2The three types of business operations are: A service business is abusiness that sells services.A merchandising business is a business that sells goods purchased for resale.There are three types of business operations: service, merchandising, and manufacturing.A manufacturing business is a business that sells goods thatit has produced.
3Meet The Style ShopThe Style Shop is a retail business that sells the latest fashion clothing. A retail business sells directly to individual customers.The Style Shop must account for the purchases and sales of goods and for Merchandise inventory .Merchandise inventory is the stock ofgoods a merchandising business keepson hand to sellIn this chapter, we will be working with a merchandising business called the Style Shop.
4Special Journals and Subsidiary Ledgers Allow for efficient recording of financial data, the accounting systems of most businesses include special journals and subsidiary ledgersA special journal is a journal used to record only one type of transaction.A new special journal will be introduced in this chapter—the sales journal.A subsidiary ledger is a ledger dedicated to accounts of a single type.
5Journal Flow Chart Does the transaction involve cash? YES NO Was cash RECEIVED?Was inventory PURCHASED?YESNOYESNORecord thetransaction inthe CASHRECEIPTS(CRs) JournalRecord thetransaction inthe CASHDISBURSEMENTS(CDs) JournalRecord thepurchase inthePURCHASESJournal (PJ)Was it a credit SALE?YESNOUse the CRs and CDs Journals to preparethe monthly Bank ReconcilationRecord theTransactionin theSALESJournal (SJ)Record theTransactionIn theGENERALJournal (GJ)
6Journals Used by Merchandising Businesses Type of JournalPurposeSalesTo record sales of merchandise on creditPurchasesTo record purchases of merchandise on creditCash receiptsTo record cash received from all sourcesThere are several special journals which are very common in business including: Sales, Purchases, Cash receipts, Cash payments and of course, the General Journal.Cash paymentsTo record all disbursements of cashGeneralTo record all transactions that are not recorded in another special journal and all adjusting and closing entries
7Ledgers Used by Merchandising Businesses Type of LedgerContentGeneralAssets, liabilities, owner’s equity, revenue, and expense accountsAccounts receivableAccounts for credit customersWe have already used the general ledger but the supporting Accounts Receivable and Accounts Payable subsidiary ledgers are also very common.Accounts payableAccounts for creditors
8The Style Shop Chart of Accounts ASSETSCashPetty Cash FundNotes ReceivableAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableMerchandise InventoryPrepaid InsurancePrepaid InterestSuppliesStore EquipmentAccumulated Depreciation - Store Equip.Office EquipmentAccumulated Depreciation - Office Equip.REVENUESalesSales Returns and AllowancesInterest IncomeMiscellaneous IncomeCOST OF GOODS SOLDPurchasesFreight InPurchases Returns and AllowancesPurchases DiscountsEXPENSESSalaries Expense - SalesSupplies ExpenseAdvertising ExpenseCash Short or OverDepreciation Expense - Store EquipmentRent ExpenseSalaries Expense - OfficeInsurance ExpensePayroll Taxes ExpenseUtilities ExpenseTelephone ExpenseUncollectible Accounts ExpenseBank Fees ExpenseDelivery ExpenseDepreciation Expense - Office EquipmentInterest ExpenseMiscellaneous ExpenseLIABILITIESNotes Payable — TradeNotes Payable — BankAccounts PayableInterest PayableSocial Security Tax PayableMedicare Tax PayableEmployee Income Tax PayableFederal Unemployment Tax PayableState Unemployment Tax PayableSalaries PayableSales Tax PayableHere is the chart of accounts for The Style Shop, our merchandising business.OWNER’S EQUITYMary Amos, CapitalMary Amos, DrawingIncome Summary
9Sales on account only! The Sales Journal A sales journal is a special journal used to record sales of merchandise on credit.Sales on account only!The Sales Journal is a special journal used to record only sales of merchandise on credit.
10General Journal and General Ledger Four credit sales made on January 3, 8, 11, and 15 require four separate entries in the general journal:Four debits to Accounts ReceivableFour credits to Sales Tax PayableFour credits to SalesFour descriptionsLet’s consider the four sales made by the business during January.
12General Journal and General Ledger The four credit sales require twelve postings to the general ledger:Four postings to Accounts ReceivableFour postings to Sales Tax PayableFour postings to SalesYIKES!After journalizing, we still need to post the transactions.
13Recording Transactions in a Sales Journal A special journal intended only for credit sales provides a more efficient method of recording these transactions.A sales journal makes the time involved in journalizing much shorter.In a sales journal, only one line is needed to record all information for each transaction. This helps avoid repetition.
14Sales Slip The Style Shop 400 400 S Harris 32 Total 432 Roy Anderson 8913 South Hampton RoadDallas, TXThe sales slip tells us who the customer is and the sales amount, the sales tax charged and the total amount that the customer must pay.
15The Style Shop SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX 2007 Trendsetter LaneDallas, TX400400S HarrisSales TaxTotal 432Roy Anderson8913 South Hampton RoadDallas, TXFirst we enter the date, then the sales slip number, then the customer’s name. Next, enter the Sales amount before taxes in the Sales column. Then enter the sales tax owed in the Sales Tax Payable column and finally, enter the total of the sales slip in the Accounts Receivable column.Even in a special journal, the total of the debits must equal the total of the credits.SALES JOURNAL PAGESALES ACCOUNTS SALES TAXDATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALESNO REF DEBIT CREDIT CREDIT20--Jan Roy Anderson
16SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALESNO REF DEBIT CREDIT CREDIT20--Jan Roy Anderson Cathy Ball Barbara Coe Amalia Rodriguez Fred Wu Linda Carter Kim Ramirez Mesia Davis , ,000Alma Sanchez Roy Anderson Totals , ,450A sales journal has specialized columns for accounts that are used most often.
17Posting from a Sales Journal With a sales journal it is not necessary to post each credit sale individually to general ledger accounts.Summary postings are made at the end of the month.Instead, summary postings are made at the end of the month after the amount columns of the sales journal are totaled.
18Before any posting takes place, the equality of the debits and credits recorded in the sales journal is proved by comparing the column totals.DR=CRMake sure that your total debits equal your total credits before any posting to the general ledger takes place.
19SALES JOURNAL PAGE 1 ACCOUNT Sales ACCOUNT NO. 401 SALES ACCOUNTS SALES TAXDATE SLIP CUSTOMER’S NAME POST RECEIVABLE PAYABLE SALESNO REF DEBIT CREDIT CREDIT20--Jan Roy AndersonCathy BallBarbara CoeAmalia RodriguezFred WuLinda CarterKim RamirezMesia DavisAlma SanchezRoy AndersonTotals , ,450(111)(231)(401)Similar posting is made to the Sales account in the general ledger.ACCOUNT Sales ACCOUNT NODATE DESCRIPTION POST. DEBIT CREDIT BALANCEREF DEBIT CREDIT20--Jan S , ,450
20Advantages of a Sales Journal Saves time, effort, and recording spaceMakes journalizing and posting more efficientRequires only three summary postings to the general ledger at the end of each monthHere are just a few advantages.Allows division of workImproves the audit trail
21The Accounts Receivable Ledger An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts.Makes it possible to verify that customers are paying their balances on time and that they are within their credit limitsProvides a convenient way to answer questions from customers regarding their current balances or about a possible billing error
22The Accounts Receivable Ledger NAME Roy AndersonADDRESS South Hampton, Dallas, TexasDATE DESCRIPTION POST DEBIT CREDIT BALANCEREF.20 --Jan Balance 3 Sales Slip SA subsidiary ledger has three money columns.The accounts receivable ledger has three money columns.The BALANCE column is presumed to contain debit amounts.
23Posting a Credit SaleEach credit sale recorded in the sales journal is posted to the appropriate customer’s account in the accounts receivable ledger.Customer accounts must be updated on the day of the sale.Postings to the accounts receivable ledger are usually made daily so that the customer accounts can be kept up to date at all times.
24SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S POST. RECEIVABLE PAYABLE SALESNO ACCOUNT DEBITED REF DEBIT CREDIT CREDIT20--Jan Roy Anderson NAME Roy AndersonADDRESS 8913 South Hampton, Dallas, TexasDATE DESCRIPTION POST DEBIT CREDIT BALANCEREF.the use of a check mark in the Posting Reference Column indicates that a subsidiary ledger was updated.20 --Jan Balance 3 Sales Slip S
25A sale is entered in the accounting records when the goods are sold or the service is provided. If something is wrong with the goods or service, the firm maytake a sales return, orgive a sales allowance.When something is wrong with a sale, a customer may return the goods or be granted a sales allowance.
26Sales Returns and Allowances A sales return is a firm’s acceptance of a return of goods from a customer.A sales allowance is a reduction in the price originally charged to customers for goods or services.Sales returns are common in business.
27Credit MemorandumWhen a return or allowance is related to a credit sale, the normal practice is to issue a credit memorandum.A credit memorandum is a note verifying that a customer’s account is being reduced by the amount of a sales return or sales allowance plus any tax that may have been involved.Credit memos are issued by the firm to customers who return a good or who receive an allowance.
28Sales Returns and Allowances A debit to the Sales Returns and Allowances account is preferred to making a direct debit to Sales.Sales Returns and AllowancesReturns and Allowances+We debit the Sales Returns and Allowances account.The Sales Returns and Allowances account is a contra revenue account.
29Business Transaction The Style Shop On January 23 The Style Shop issued Credit Memorandum 101 for a sales allowance to Fred Wu for merchandise purchased on account. The merchandise was damaged but still usable.The Style Shop150NAME: Fred WuADDRESS: Trendsetter LaneDallas, TX 75268PHONE:Here is an example of a sales allowance which is granted to Fred Wu.15012162
30Sales Returns and Allowances Sales AllowanceSales Returns and AllowancesAccounts ReceivableSales Tax Payable+150--12-162++Here is how it looks in the T accounts.
31How does a sales allowance transaction affect the financial statements? QUESTION:Net income is decreased. Assets, liabilities, and equity are decreased.ANSWER:A sales allowance will reduce net sales on the income statement and will reduce Accounts Receivable and Sales Tax Payable on the balance sheet.
32Posting a Sales Return or Allowance Each sales return or allowance must be posted from the journal to the: General Ledger A/R and customer’s account in the subsidiary A/R ledger.In addition, any subsidiary ledger accounts must be updated daily.
33Posting from the General Journal Date20--DESCRIPTIONPOST. REF.DEBITCREDITJanSales Returns and AllowancesSales Tax PayableAccounts Rec./Linda CarterAccepted a return of defectivemerchandise,Credit Memorandum 102;original sale made on SalesSlip 1106 of January 21.451231111/45036486111 indicates that the amount was posted to the Accounts Receivable account in the general ledger. The check mark indicates that the amount was posted to the customer’s account.NAME Linda CarterADDRESS Belt Line Road, Dallas, TXDATE DESCRIPTION POST DEBIT CREDIT BALANCEREF.Please note the double posting reference if the return had been journalized in a general journal instead.20 --Jan Balance 21 Sales Slip S25 CM J
34Sales Returns and Allowances account and the Sales Discounts account. Reporting Net SalesNet sales is the difference between the balance in the Sales account and the balance in theSales Returns and Allowances account and theSales Discounts account.Subtract any Sales Returns and Allowances from the Sales account.
35Note: there are no sales discounts Less Sales Returns and AllowancesNet SalesThe Style Shopcalculation for net salesMonth Ended January 31, 20--$25,700<600>$25,100Notice that net sales is $25,100 for the month of January for The Style Shop.Note: there are no sales discountsin this problem
36Schedule of Accounts Receivable The use of an accounts receivable ledger does not eliminate the need for the Accounts Receivable account in the general ledger.However, the general ledger balance for A/R isnow considered a control account because it is the summary of all the subsidiary A/R accounts.The Accounts Receivable account is the control account in the General ledger. Its total is reported on the balance sheet.
37At the end of each month, after all the postings have been made, the balances in the accounts receivable ledger must be proved against the balance of the Accounts Receivable general ledger account.The schedule of accounts receivable is simply a list of all of your customers and how much they owe.TOTAL OF INDIVIDUALCUSTOMER BALANCESACCOUNTS RECEIVABLE BALANCE=
38Schedule of Accounts Receivable A schedule of accounts receivable is a listing of all balances of the accounts in the accounts receivable subsidiary ledger.The schedule of accounts receivable is particularly important to a business owner or credit manager in keeping track of how much money someone owes the company and for how long that amount has been outstanding.The names of all customers with account balances are listed with the amount of their unpaid balances.
39Schedule of Accounts Receivable The Style ShopSchedule of Accounts ReceivableJanuary 31, 20--Roy AndersonCathy BallLinda CarterBarbara CoeMesia DavisKim RamirezAmalia RodriguezAlma SanchezFred WuTotal70264854129610212169724646345A comparison of the total of the schedule of accounts receivable and the balance of the Accounts Receivable account shows that the two figures are the same.ACCOUNT Accounts Receivable Account NoDATE DESCRIPTION POST DEBIT CREDIT BALANCEREF DEBIT CREDITNotice that the total in the Schedule of Accounts Receivable equals the total in the General ledger Accounts Receivable account.20 --Jan Balance JJ S CR
40Credit Sales for a Wholesale Business A wholesale business is a manufacturer or distributor of goods that sells to retail businesses or large consumers.The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers except no sales tax and many wholesalers offer cash and trade discountsA wholesale business is a firm which sells goods to another firm who will then sell it to the final consumer.
41Net Price The list price is the established retail price. A trade discount is a reduction from the list price.A trade discount is a reduction from the list price.The net price is the list price less all trade discounts.
42Formula for Net Price – = List Price–Trade Discounts=Net PriceHere is the formula for figuring Net price.
43Trade discounts can be offered as The same goods may be offered to different customers at different trade discounts.Trade discounts can be offered asA single trade discountA series of trade discountsThe amount of the trade discount may depend on the size of the order and the costs of selling to the various types of customers.
44List price x trade discount Single Trade DiscountSuppose the list price of goods is $1,500 and the trade discount is 40 percent.List Price$1,500x %List price x trade discountA single trade discount of 40% provides a discount of $600.$Discount
45Single Trade DiscountSuppose the list price of goods is $1,500 and the trade discount is 40 percent.List price$1,500< 600>trade discountSubtracting the discount of $600 gives a net price of $900 which would be owed by the customer.$ 900Net Price
46Series of Trade Discounts Suppose the list price is $1,500 and the trade discount is quoted as a series of 25 and 15 percent.first discount $1,500 x 25%=$375$1,500<375>second discount $1,125 x 15%=$168.75$1,125<168.75>If the retailer offers a series discount of first 25% and then 15%, then the first discount of 25% would provide a discount of $375.$956.25Net price
47Using a Sales Journal for a Wholesale Business Special journals such as the sales journal can vary in format from company to company.Special sales journals will vary in appearance from company to company.No sales tax for a Wholesale Business
48The sales journal has a single amount column. Sales taxes apply only to retail transactions. A wholesale business does not need to account for sales taxes.SALES JOURNAL PAGEACCOUNTSDATE INVOICE CUSTOMER’S POST RECEIVABLE DR.NO ACCOUNT DEBITED REF SALES CR.20--Jan Gabbert’s Hardware Company ,600Neal’s Department Store 4,200Total ,875(111/401)Since wholesalers don’t collect sales tax on their sales, they have no need of a Sales Tax Payable column in their sales journal.The sales journal has a single amount column.
49Posting from a Single-Column Journal SALES JOURNAL PAGEACCOUNTSDATE INVOICE CUSTOMER’S POST RECEIVABLE DR.NO ACCOUNT DEBITED REF SALES CR.20--Jan Gabbert’s Hardware Company ,600Neal’s Department Store 4,200Total ,875(111/401)DATE DESCRIPTION POST DEBIT CREDIT BALANCEREF DEBIT CREDIT20--Jan Balance ,700S , ,575ACCOUNT Accounts Receivable ACCOUNT NOPosting rules would be the same as in the previous sales journal discussed earlier.DATE DESCRIPTION POST DEBIT CREDIT BALANCEREF DEBIT CREDIT20--Jan S , ,875ACCOUNT Sales ACCOUNT NO
50InvoiceAn invoice is a customer billing for merchandise bought on credit.Invoices may be given to the customer at the time of the sale or mailed to them.
51Sales on CreditEach business must develop credit policies that achieve maximum sales with minimum losses:A credit policy that is too tight results in a low level of losses at the expense of increases in sales volume.A credit policy that is too lenient may result in increased sales volume accompanied by a high level of losses.The use of credit is considered to be one of the most important factors in the rapid growth of businesses today.
52A Cost of Doing Business Even though the credit investigation is thorough, some accounts receivable become uncollectible.Unexpected business developments, errors of judgment, incorrect financial data, and many other causes may lead to defaults in payments by customers.Some customers may never pay what is owed.
53Different Types of Credit Sales Open-account creditMost commonly offered by small businesses granted on the basis of personal knowledge of the customerBusiness credit cardsdepartment store chains and gasoline companies, provide their own credit cards Cards issued by credit card companiesThere are four very common types of credit sales.
54Bank Credit Cards Retailers can provide credit while minimizing or avoidingthe risk of losses from uncollectibleaccounts by accepting bank credit cards.The most widely accepted bank credit cards are MasterCard and Visa.Good examples of Bank credit cards are Visa and MasterCard. The same accounts are affected by a bank card sale as a cash sale.Bank credit cards are issued to consumers directly by banks.