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Accounting for Sales and Accounts Receivable Section 3: Special Topics in Merchandising Chapter 7 Section Objectives 7. Compute trade discounts. 8. Record credit card sales in appropriate journals. 9. Prepare the state sales tax return. McGraw-Hill© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

7-151 An invoice is a customer billing for merchandise bought on credit. ANSWER: QUESTION: What is an invoice?

7-152 Credit Policies

7-153 Sales on credit are made by large numbers of merchandisers and by many professional people and service businesses. Sales on Credit

7-154 The volume of both sales and profits will increase if buyers are given a period of a month or more to pay for the goods or services they purchase. Advantages of Credit Sales

7-155 Sales on credit will lead to increases in profit only if each customer completes the transaction by paying for the goods or services purchased. If payment is not received, the expected profits become actual losses and the purpose for granting the credit is defeated. Therefore businesses need to closely analyze a customer’s ability to pay before granting credit. Disadvantages of Credit Sales

7-156 A 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.

7-157 Each 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. Credit Policies

7-158 Accounting for Different Types of Credit Sales

7-159 Open-account credit Business credit cards Bank credit cards Cards issued by credit card companies Types of Credit Sales

7-160 Open-account credit is a system that allows the sale of services or goods with the understanding that payment will be made at a later date. ANSWER: QUESTION: What is open-account credit?

7-161 Open-Account Credit Most commonly offered by professional people and small businesses Permits the sale of services or goods to the customer with the understanding that the amount is to be paid at a later date Granted on the basis of personal acquaintance or knowledge of the customer

7-162 Business Credit Cards Many retail businesses, especially large ones such as department store chains and gasoline companies, provide their own credit cards (sometimes called charge cards). Whenever a sale is completed using a business credit card, a sales slip is prepared in the usual manner. Many companies use computerized card readers and sales registers that print out a sales slip with the customer information.

7-163 Business credit card sales are similar to open-account credit sales. A business credit card sale is recorded as: A debit to Accounts Receivable A credit to a revenue account such as Sales A customer payment is recorded as: A debit to Cash A credit to Accounts Receivable

7-164 Bank Credit Cards Retailers can provide credit while minimizing or avoiding the risk of losses from uncollectible accounts by accepting bank credit cards. The most widely accepted bank credit cards are MasterCard and Visa. Bank credit cards are issued to consumers directly by banks.

7-165 When a business makes a sale on a bank credit card, it acquires an asset that can be converted into cash immediately without responsibility for later collection from the customer.

, Periodically (preferably each day) the completed sales slips from bank credit card sales are totaled. The number of sales slips and the total amount of the sales are recorded on a special deposit form. The deposit form, along with the completed slips, is presented to the firm’s bank in much the same manner as a cash deposit. The Style Shop 2,

7-167 Depending on the arrangements that have been made, either the bank will deduct a fee, called a discount, and immediately credit the depositor's checking account with the net amount of the sales, or it will credit the depositor's checking account for the full amount of the sales and then deduct the discount at the end of the month. If the second procedure is used, the total discount for the month will appear on the bank statement.

7-168 Credit cards such as American Express and Diners Club are issued by business firms or subsidiaries of business firms that are operated for the special purpose of handling credit card transactions. Credit Card Companies Diner’s Club

7-169 Accounting for Credit Card Sales

7-170 Objective 8 Record credit card sales in appropriate journals.

7-171 The procedure used to account for credit card sales is similar to the procedure for recording open-account credit sales. However, the account receivable is with the credit card company, not with the cardholders who buy the goods or services.

7-172 Recording Credit Card Sales There are two basic methods of recording credit card sales.

7-173 Method 1: No Separate General Ledger Accounts Businesses that have few transactions with credit card companies normally debit the amounts of such sales to the usual Accounts Receivable account in the general ledger and credit them to the same Sales account that is used for cash sales and other types of credit sales. Payment from a credit card company is recorded in the cash receipts journal.

7-174 An individual account for each credit card company is set up in the accounts receivable subsidiary ledger. SALES JOURNAL PAGE 12 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S POST. RECEIVABLE PAYABLE SALES NO. ACCOUNT DEBITED REF. DEBIT CREDIT CREDIT 20-- Jan American Express (Wilson Davis) Master Card (Teresa Wells)

7-175 Firms that do a large volume of business with credit card companies might use separate general ledger accounts: Sales–Credit Card Companies Accounts Receivable–Credit Card Companies Method 2: Separate General Ledger Accounts

7-176 Remember that special journals can vary in format. SALES JOURNAL PAGE 7 ACCT. REC.- SALES - SALES CUSTOMER’S ACCOUNTS CREDIT CARD SALES TAX CREDIT CARD DATE SLIP ACCOUNT DEBITED POST RECEIVABLE COMPANIES PAYABLE SALES COMPANIES NO. REF. DEBIT DEBIT CREDIT CREDIT CREDIT 20— Jan. 3 Summary of credit card sales/American Express 9, , Summary of credit card sales/Master Card 5, , Totals 48, , , (114) (231) (404)

7-177 Thank You for using College Accounting, 11th Edition Price Haddock Brock