Accounting for a Merchandising Business: Sales and Cash Receipts

1
Chapter 8

• Accounting for a Merchandising Business Sales
  and Cash Receipts

2
Remember

• There are two sides to merchandising operations.
• Buying Goods
• Selling Goods

3
Payment Policies

• Retailers and wholesalers normally have different
  payment policies or terms of sale for their
  customers.
• Retail merchandising businesses (department
  stores and supermarkets) sell goods directly to
  individual consumers.

4
Payment Policies

• When retailers sell goods, they normally allow
  their customers to pay using
• Cash
• Credit cards
• Debit cards
• Revolving charge plans
• C.O.D.

5
Revolving Charge Plans

• Revolving charge plans allow customers to pay for
  goods over a period of time.
• The customers pay a percentage of the amount owed
  and a finance charge each month.

6
C.O.D. Sales

• C.O.D. (cash on delivery) sales are made with the
  understanding that the customer will pay for the
  goods when they are delivered.

7
Remember

• Wholesale merchandising businesses buy goods in
  bulk from manufacturers and sell them mostly to
  retailers and organizations such as hospitals and
  schools.

8
Terms of Sale for Wholesalers

• Wholesalers usually make most of their sales on
  credit.
• Wholesalers make some sales for cash, especially
  to new customers who have not yet established a
  credit relationship or to customers who have poor
  credit records.

9
Terms of Sale for Wholesalers

• Net Cash
• C.O.D.
• n/30
• 2/10,n/30
• n/EOM

10
Terms of Sale for WholesalersCash Sales

• Net Cashthe customer must pay the net (full)
  amount owed for the goods when the sale is made.
• C.O.D.the customer must pay for the goods when
  they are delivered.

11
Terms of Sale for WholesalersCredit Sales

• n/30the customer must pay the net (full) amount
  of the invoice within 30 days of its date.
• 2/10,n/30the customer can take a 2 discount if
  the invoice is paid within 10 days of its date.
  Otherwise, the net (full) amount of the invoice
  is due within 30 days.
• n/EOMthe customer must pay for the goods by the
  end of the month in which they were sold.

12
Credit Terms and Credit Periods

• Credit terms are terms such as n/30, n/EOM, and
  2/10,n/30.
• Credit period is the period of time the customer
  is allowed to take before paying an invoice
  specified by the credit terms.

13
Freight Charges

• The terms of sale should include an indication of
  who will pay the freight chargesthe charges for
  shipping the goods.
• FOB (free on board) shipping point means the
  customer is responsible for paying the charges.
• FOB (free on board) destination means the seller
  is responsible for paying the charges.

14
Processing Cash and Credit Sales

• Retail businesses normally use a cash register to
  record cash sales and prepare sales tickets or
  sales slips for credit sales.
• Journal entries are made from the totals on the
  daily cash register tapes and from copies of the
  sales tickets.

15
Initiating a Credit Sale

• A credit sale starts with the receipt of a
  purchase order from the customer or with a sales
  order prepared by one of the firms salespeople.
• The sales order specifies the goods the customer
  wants and the quantities needed.
• In many firms, every credit sale is recorded on a
  sales order even if a purchase order is received
  from the customer.

16
Preparing the Sales Invoice

• A copy of the sales order is given to the credit
  department for approval.
• Once approved, the sales order is sent to the
  billing department, which prepares a sales
  invoice.

17
Using the Sales Invoice

• The copies of the sales invoice might be
  distributed as follows.
• Copy 1to the sales department for its files.
• Copy 2to the customer as a bill for the goods.
• Copy 3to the accounting department, where it
  will be used to journalize the transaction.

18
Using the Sales Invoice

• Copy 4to the credit department for its files.
• Copy 5to the shipping department, which uses it
  to select the required goods from stock and ship
  them to the customer.

19
Sales Account

• A sale of merchandise causes an increase in
  revenue, which increases owners equity.
• In a merchandising business, the main revenue
  account is called Sales.

20
Sales Account

• Like all revenue accounts, the Sales account has
  a normal Cr. balance and is reported on the
  income statement.
• The Sales account is a temporary owners equity
  account. It is closed into the Income Summary
  account at the end of each accounting period.

21
Recording Cash Sale of Merchandise

• A firm sells merchandise for 400 in cash. The
  effect of this transaction is to increase revenue
  and to increase the asset Cash. It is recorded by
  debiting the Cash account for 400 and crediting
  the Sales account for 400.

22
Recording Cash Sale of Merchandise

• Cash
• 3/1 Bal. 6,500
• 3/1 400

23
Recording Cash Sale of Merchandise

• Sales
• 3/1 400

24
Recording Credit Sale of Merchandise

• A firm sells merchandise for 1,200 on credit.
  The effect of this transaction is to increase
  revenue and to increase the asset Accounts
  Receivable. It is recorded by debiting the
  Accounts Receivable account for 1,200 and
  crediting the Sales account for 1,200.

25
Recording Credit Sale of Merchandise

• Accounts Receivable
• 3/1 Bal. 8,100
• 3/2 1,200

26
Recording Credit Sale of Merchandise

• Sales
• 3/1 400
• 3/2 1,200

27
Recording Sale of Merchandise

• 20X1
• Mar. 1 Cash 400
• Sale 400
• Sold merchandise for cash.
• 2 Accounts ReceivableAaron 1,200
• Company Sales 1,200
• Sold merchandise on credit.

28
Sales Journal

• If a firm has a large number of credit sales, it
  is more efficient to record these transactions in
  a sales journal.
• The sales journal is a special journal used to
  record only sales of merchandise on credit.

29
Recording Transactions in the Sales Journal

• The simplest type of sales journal contains a
  single money column, labeled Accounts Receivable
  Debit/Sales Credit.
• A credit sale is entered by recording
• Date of the invoice
• Number of the invoice
• Name of the customer
• Amount of the invoice

30
Remember

• Businesses with many creditors set up an accounts
  payable ledger. This subsidiary ledger contains
  only the accounts of creditors.
• The balances in the accounts payable ledger are
  summarized by a controlling account in the
  general ledger called Accounts Payable.

31
Accounts Receivable Ledger

• Like the accounts payable ledger, businesses that
  have many credit customers set up an accounts
  receivable ledger.
• It is a subsidiary ledger containing only the
  accounts of credit customers.
• The balances are summarized by a controlling
  account in the general ledger called Accounts
  Receivable.

32
Accounts Receivable Ledger

• The accounts are usually arranged in alphabetical
  order rather than numbered.
• A form with three money columnsDr., Cr., and
  Balanceis sufficient.
• Because Accounts Receivable is an asset account,
  it is presumed that all customers accounts will
  have Dr. balances. Thus, only one balance column
  is needed in the customers accounts.

33
Posting from the Sales Journal

• During the month, the entries in the sales
  journal are posted individually to the accounts
  receivable ledger on a daily basis.
• Each amount in the sales journal is debited to
  the appropriate customers account in the
  accounts receivable ledger.
• A check mark is placed in the P.R. column of the
  sales journal to show an entry has been posted to
  the accounts receivable ledger.

34
Posting from the Sales Journal

• At the end of each month, the one-column sales
  journal is totaled and ruled.
• The total is posted to the general ledger as a
  debit to the Accounts Receivable account and a
  credit to the Sales account.
• The numbers of the two general ledger accounts
  are placed in parentheses under the total of the
  sales journal to show that posting of the total
  has been completed.

35
Sales Returns and Allowances

• When a customer receives defective or incorrect
  goods, the seller may take back goods or offer a
  reduction in price if the customer keeps the
  goods.
• These transactions are called sales returns and
  allowances by the seller.
• The effect is to reduce the revenue from sales.

36
Sales Returns and Allowances

• If the defective or incorrect goods were sold for
  cash, the seller provides the customer with a
  cash refund.
• If the defective or incorrect goods were sold on
  credit, the seller issues a credit memorandum to
  the customer.

37
Sales Returns and Allowances Account

• To give a business a clearer record of its sales
  returns and allowances it is a good practice to
  use a separate account called Sales Returns and
  Allowances to record the reduction in sales
  revenue.
• This account is a contra account so its Dr.
  balance is opposite to the normal Cr. balance of
  a revenue account.

38
Recording Sales Returns and Allowances

• 20X1
• Mar. 5 Sales Returns and Allowances 411.1 75
• Cash 111 75
• Gave a cash refund to a
• customer.
• 6 Sales Returns and Allowances 411.1 200
• Accounts ReceivableAaron 112/? 200
• Company
• Granted credit to a customer.

39
Sales Discounts

• Cash discounts are called sales discounts by the
  seller.
• The effect of sales discounts is to reduce the
  revenue from sales.

40
Sales Discounts Account

• Sales Discounts is debited to record the amounts
  of the cash discounts taken by customers.
• Sales Discounts is a contra account. Its Dr.
  balance is opposite to the normal Cr. balance of
  a revenue account.

41
Recording Sales Discounts

• A sales discount is recorded when the seller
  receives a check from the customer for the price
  of the goods less the discount.

42
Recording Sales Discounts

• Example
• On May 1, the Stevens Company sells goods for
  500 to the Fashion Shop on terms of 2/10,n/30.
  On May 10, the Stevens Company receives a check
  for 490 to settle the 500 invoice, less a
  discount of 10.

43
Recording Sales Discounts

• 20X1
• May 10 Cash 111 490
• Sales Discounts 411.2 10
• Accounts Receivable 112/? 500
• Fashion Shop
• Received cash on account.

44
Recording Cash Receipts

• If a business has many cash receipts, it is more
  efficient to use a special journal to record
  these transactions.

45
Recording Cash Receipts

• The cash receipts journal is usually a
  multicolumn journal.
• A firm might have five money columns
• General Credit
• Sales Credit
• Accounts Receivable Credit
• Sales Discount Debit
• Cash Debit

46
Posting Individual Entries

• During the month, the amounts in the Accounts
  Receivable Credit column of the cash receipts
  journal are posted individually to the subsidiary
  ledger on a daily basis.
• The amounts in the General Credit column are
  posted individually to the general ledger
  accounts involved on a daily, weekly, or monthly
  basis.

47
Posting Individual Entries

• Check marks in the P.R. column of the journal
  show that postings have been made to the
  subsidiary ledger. Account numbers indicate
  postings to the general ledger.

48
Posting Totals

• At the end of each month, the cash receipts
  journal is totaled, proved, and ruled.
• The totals of all money columns except the
  General Credit column are posted to the general
  ledger.

49
Posting Totals

• The account numbers are placed in parentheses
  under the totals that were posted.
• A check mark in parentheses under the total of
  the General Credit column shows that the amount
  was not posted.

50
Schedule of Accounts Receivable

• At the end of each month, a schedule of accounts
  receivable is prepared to check the accuracy of
  the postings to the accounts receivable ledger.
• The balance of each customers account is listed
  and the schedule is totaled.
• The total is compared with the balance of the
  Accounts Receivable controlling account in the
  general ledger. The two amounts should agree.

51
Stevens CompanySchedule of Accounts
ReceivableMay 31, 20X1

• Casual Styles 2,400
• DRJ Boutique 3,200
• Fashion Shop 1,800
• Lees Clothing 4,100
• Total 11,500
• Controlling Account in General Ledger
• Accounts Receivable
• 5/31 Bal. 11,500

52
Sales Taxes

• Most state governments and some country and city
  governments impose a tax on the retail price of
  the goods sold to consumers called a sales tax.
• Retailers must collect sales tax and send it to
  the government at regular intervals, usually once
  a month.

53
Accounting for Sales Taxes

• Because the sales tax collected by the retailer
  is owed to the government, the retailer records
  it in a liability account called Sales Tax
  Payable.
• Example
• Bobs Discount Store is located in a state that
  imposes a 6 sales tax. On April 1, it sold goods
  for 5,000 in cash and collected sales tax of
  300.

54
Accounting for Sales Taxes

• 20X1
• Apr. 1 Cash 5,300
• Sales 5,000
• Sales Tax Payable 300
• Cash sales for the day.

55
Accounting for Sales Taxes

• When the retailer sends the sales tax collected
  to the government, the Sales Tax Payable account
  is debited.
• Example
• On May 20, Bobs Discount Store sent a check for
  10,800 to the state to remit the sales tax owed
  for the month of April.

56
Accounting for Sales Taxes

• 20X1
• May 20 Sales Tax Payable 10,800
• Cash 10,800
• Remitted the sales
• tax for April.

57
Credit Card Sales

• Many retail businesses allow their customers to
  use credit cards to buy goods and services. The
  three basic types of credit cards are
• Bank credit cards, such as those issued by the
  Visa and MasterCard systems

58
Credit Card Sales

• Credit cards issued by private credit card
  companies such as those issued by American
  Express and Diners Club
• Credit cards issued by large businesses for use
  by their own customers, such as those issued by
  Sears and Exxon

59
Recording Bank Credit Card Sales

• Bank credit card sales are recorded as cash sales
  because the credit card receipts can be deposited
  in the bank.
• The bank deducts a discount (fee) that usually
  ranges from 3 to 7. The difference between the
  total of the credit card receipts and the
  discount is credited to the depositors account.

60
Recording Bank Credit Card Sales

• The following entry shows bank credit card sales
  of 1,000, sales tax of 60, and a discount of
  53 on the total credit card receipts (1,060 ?
  .05). The discount is debited to an account
  called Credit Card Expense.

61
Recording Bank Credit Card Sales

• 20X1
• Apr. 1 Cash 1,007
• Credit Card Expense 53
• Sales 1,000
• Sales Tax Payable 60
• Bank credit card sales
• for the day.

62
Recording Private Credit Card Sales

• For sales involving credit cards issued by
  private companies like American Express, the
  retailer summarizes the sales receipts
  periodically and sends them to the company for
  payment.
• This type of sale is treated as a credit sale. It
  is debited to an account called Accounts
  ReceivableCredit Cards.

63
Recording Private Credit Card Sales

• The following general journal entry shows nonbank
  credit card sales of 1,500, sales tax of 90,
  and a discount of 79.50 on the total credit card
  receipts (1,590 ? .05).

64
Recording Private Credit Card Sales

• 20X1
• Apr. 7 Accounts Receivable 1,510.50
• Credit Cards
• Credit Card Expense 79.50
• Sales 1,500.00
• Sales Tax Payable 90.00
• Nonbank credit card
• sales for week.

65
Credit Cards Issued by Businesses

• Some large businesses, such as department stores
  and oil companies, issue credit cards to
  customers for use at their own outlets.
• Sales made with these credit cards are treated as
  regular credit sales because the companies that
  make the sales do their own billing.

66
Journals

• Purchases Journalrecords purchases of
  merchandise on credit.
• Cash Payments Journalrecords all payments of
  cash.
• Sales Journalrecords sales of merchandise on
  credit.
• Cash Receipts Journalrecords all receipts of
  cash.

67
Journals

• The general journal is used to record
  transactions that do not belong in the special
  journals and to record correcting entries,
  adjusting entries, and closing entries.

68
Ledgers

• The accounts payable ledger is a subsidiary
  ledger containing the accounts of all creditors.
• The accounts receivable ledger is a subsidiary
  ledger containing the accounts of all credit
  customers.

69
Ledgers

• The general ledger is the main ledger of a
  business containing the accounts that appear on
  the financial statements
• Asset
• Liability
• Capital
• Drawing
• Revenue
• Cost
• Expense accounts