college accounting

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Chapter
7
Skyline College
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The three types of business operations are
3
Meet The Style Shop

• The 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 of
• goods a merchandising business keeps
• on hand to sell

4
Special Journals and Subsidiary Ledgers
Allow for efficient recording of financial data,
the accounting systems of most businesses include
special journals and subsidiary ledgers
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Journal Flow Chart
Does the transaction involve cash?
YES
NO
Was cash RECEIVED?
Was inventory PURCHASED?
NO
NO
YES
YES
Record the transaction in the CASH RECEIPTS (CRs)
Journal
Record the transaction in the CASH DISBURSEMENTS (
CDs) Journal
Record the purchase in the PURCHASES Journal
(PJ)
Was it a credit SALE?
YES
NO
Use the CRs and CDs Journals to prepare the
monthly Bank Reconcilation
Record the Transaction in the SALES Journal (SJ)
Record the Transaction In the GENERAL Journal (GJ)
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Journals Used by Merchandising Businesses

To record sales of merchandise on credit
Sales
To record purchases of merchandise on credit
Purchases
Cash receipts
To record cash received from all sources
Cash payments
To record all disbursements of cash
General
To record all transactions that are not recorded
in another special journal and all adjusting and
closing entries
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Ledgers Used by Merchandising Businesses

General
Assets, liabilities, owners equity, revenue, and
expense accounts
Accounts receivable
Accounts for credit customers
Accounts payable
Accounts for creditors
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The Style Shop Chart of Accounts
ASSETS 101 Cash 105 Petty Cash
Fund 109 Notes Receivable 111
Accounts Receivable 112 Allowance for
Doubtful Accounts 116 Interest
Receivable 121 Merchandise Inventory 126
Prepaid Insurance 127 Prepaid
Interest 129 Supplies 131 Store
Equipment 132 Accumulated Depreciation -
Store Equip. 141 Office Equipment 142
Accumulated Depreciation - Office Equip.
REVENUE 401 Sales 451 Sales
Returns and Allowances 491 Interest
Income 493 Miscellaneous Income

• COST OF GOODS SOLD
• 501 Purchases
• 502 Freight In
• 503 Purchases Returns and Allowances
• 504 Purchases Discounts

• EXPENSES
• 611 Salaries Expense - Sales
• 612 Supplies Expense
• Advertising Expense
• 617 Cash Short or Over
• 626 Depreciation Expense - Store
  Equipment
• Rent Expense
• 637 Salaries Expense - Office
• Insurance Expense
• Payroll Taxes Expense
• 643 Utilities Expense
• 649 Telephone Expense
• Uncollectible Accounts Expense
• 657 Bank Fees Expense
• 658 Delivery Expense
• 659 Depreciation Expense - Office
  Equipment
• 691 Interest Expense
• 693 Miscellaneous Expense

LIABILITIES 201 Notes Payable Trade 202
Notes Payable Bank 205 Accounts
Payable 216 Interest Payable 221
Social Security Tax Payable 222 Medicare
Tax Payable 223 Employee Income Tax
Payable 225 Federal Unemployment Tax
Payable 227 State Unemployment Tax
Payable 229 Salaries Payable 231
Sales Tax Payable
OWNERS EQUITY 301 Mary Amos,
Capital 302 Mary Amos, Drawing 399
Income Summary
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The Sales Journal
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General 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 Receivable
• Four credits to Sales Tax Payable
• Four credits to Sales
• Four descriptions

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General Journal and General Ledger

• The four credit sales require twelve postings to
  the general ledger
• Four postings to Accounts Receivable
• Four postings to Sales Tax Payable
• Four postings to Sales

YIKES!
13
Recording Transactions in a Sales Journal

• A special journal intended only for credit sales
  provides a more efficient method of recording
  these transactions.

In a sales journal, only one line is needed to
record all information for each transaction. This
helps avoid repetition.
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Sales Slip
The Style Shop
400
400
S Harris
32
Total 432
Roy Anderson 8913 South Hampton Road Dallas, TX
75232
15
The Style Shop 2007 Trendsetter Lane Dallas, TX
75268
400
400
S Harris
Sales Tax 32
Total 432
Roy Anderson 8913 South Hampton Road Dallas, TX
75232
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SALES
JOURNAL PAGE 1
SALES
ACCOUNTS SALES
TAX DATE SLIP CUSTOMERS NAME POST.
RECEIVABLE PAYABLE SALES


NO.
REF. DEBIT
CREDIT CREDIT 20-- Jan. 3
1101 Roy Anderson ?
214 14 200
8 1102 Cathy Ball
? 535 35
500

11
1103 Barbara Coe
? 642 42
600

15 1104 Amalia Rodriguez
? 428 28
400 18 1105 Fred
Wu ?
856 56 800
21 1106 Linda Carter
? 321 21
300 28 1107 Kim
Ramirez ?
107 7 100


29 1108 Mesia Davis
? 1,070
70 1,000 31 1109
Alma Sanchez ?
963 63 900
31 1110 Roy Anderson
? 267 17
250 31
Totals
5,886 436 5,450
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Posting from a Sales Journal

• With a sales journal it is not necessary to post
  each credit sale individually to general ledger
  accounts.

Instead, summary postings are made at the end of
the month after the amount columns of the sales
journal are totaled.
18

• Before any posting takes place, the equality of
  the debits and credits recorded in the sales
  journal is proved by comparing the column totals.

DRCR
19
31 Totals
5,886 436 5,450
(111)
(401)
(231)
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Advantages of a Sales Journal

• Saves time, effort, and recording space

• Makes journalizing and posting more efficient

• Requires only three summary postings to the
  general ledger at the end of each month

• Allows division of work

• Improves the audit trail

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The Accounts Receivable Ledger

• Makes it possible to verify that customers are
  paying their balances on time and that they are
  within their credit limits

• Provides a convenient way to answer questions
  from customers regarding their current balances
  or about a possible billing error

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The Accounts Receivable Ledger
NAME Roy Anderson
ADDRESS 8913 South Hampton,
Dallas, Texas 75232-6002 DATE
DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF.
20 -- Jan. 1 Balance ?
432
3 Sales Slip 1101 S1
432 864

• The accounts receivable ledger has three money
  columns.

• The BALANCE column is presumed to contain debit
  amounts.

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Posting a Credit Sale
Each credit sale recorded in the sales journal is
posted to the appropriate customers account in
the accounts receivable ledger.
Postings to the accounts receivable ledger are
usually made daily so that the customer accounts
can be kept up to date at all times.
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SALES
JOURNAL PAGE 1
SALES
ACCOUNTS SALES
TAX DATE SLIP CUSTOMERS POST.
RECEIVABLE PAYABLE SALES


NO. ACCOUNT DEBITED
REF. DEBIT CREDIT
CREDIT 20-- Jan. 3 1101 Roy Anderson
? 432 32
400
NAME Roy Anderson
ADDRESS 8913 South Hampton, Dallas,
Texas 75232-6002 DATE DESCRIPTION
POST. DEBIT CREDIT
BALANCE
REF.
20 -- Jan. 1 Balance ?
432 3 Sales Slip 1101
S1 432 864

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A 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 may
• take a sales return, or
• give a sales allowance.

26
Sales Returns and Allowances
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Credit Memorandum
When a return or allowance is related to a credit
sale, the normal practice is to issue a credit
memorandum.
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A debit to the Sales Returns and Allowances
account is preferred to making a direct debit to
Sales.
Sales Returns and Allowances
The Sales Returns and Allowances account is a
contra revenue account.
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Business Transaction

• 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 Shop
150
NAME Fred Wu ADDRESS 2007 Trendsetter
Lane Dallas, TX 75268 PHONE
150
12
162
30
Sales Allowance
Sales Returns and Allowances
Accounts Receivable
Sales Tax Payable
150
- 162
- 12
-


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Each sales return or allowance must be posted
from the journal to the General Ledger
A/R and customers account in the
subsidiary A/R ledger.
Posting a Sales Return or Allowance
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Posting from the General Journal
Date 20-- DESCRIPTION POST. REF. DEBIT CREDIT
Jan. 25 Sales Returns and Allowances Sales Tax Payable Accounts Rec./Linda Carter Accepted a return of defective merchandise, Credit Memorandum 102 original sale made on Sales Slip 1106 of January 21. 451 231 111/? 450 36 486
111 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 customers account.
NAME Linda Carter ADDRESS 1819
Belt Line Road, Dallas, TX 75267-6318 DATE
DESCRIPTION POST. DEBIT
CREDIT BALANCE

REF.
20 -- Jan. 1 Balance
?
54
21 Sales Slip 1106 S1
486 540 25 CM 102
J1
486
54
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Reporting Net Sales
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Note there are no sales discounts in this
problem
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Schedule 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 is
• now considered a control account because it is
  the summary of all the subsidiary A/R accounts.

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At 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.
TOTAL OF INDIVIDUAL CUSTOMER BALANCES
ACCOUNTS RECEIVABLE BALANCE

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Schedule of Accounts Receivable

• The names of all customers with account balances
  are listed with the amount of their unpaid
  balances.

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The Style Shop Schedule of Accounts Receivable January 31, 20-- The Style Shop Schedule of Accounts Receivable January 31, 20--
Roy Anderson Cathy Ball Linda Carter Barbara Coe Mesia Davis Kim Ramirez Amalia Rodriguez Alma Sanchez Fred Wu Total 702 648 54 1296 1021 216 972 972 464 6345
A 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 No.
111 DATE DESCRIPTION
POST. DEBIT CREDIT
BALANCE
REF.
DEBIT CREDIT

20 -- Jan. 1 Balance
?
3240 23
J1
162 3078
25
J1 486
2592 31
S1 5886
8478 31
CR1
2133 6345
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Credit Sales for a Wholesale Business
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
discounts
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Net Price
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Formula for Net Price
List Price

Trade Discounts

Net Price
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The same goods may be offered to different
customers at different trade discounts.
Trade discounts can be offered as

• A single trade discount
• A series of trade discounts

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Single Trade Discount
Suppose the list price of goods is 1,500 and the
trade discount is 40 percent.
List price x trade discount
600
Discount
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Single Trade Discount
Suppose the list price of goods is 1,500 and the
trade discount is 40 percent.
trade discount
900
Net Price
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Series of Trade Discounts
Suppose the list price is 1,500 and the trade
discount is quoted as a series of 25 and 15
percent.
956.25
Net price
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Using a Sales Journal for a Wholesale Business
Special journals such as the sales journal can
vary in format from company to company.
No sales tax for a Wholesale Business
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Sales taxes apply only to retail transactions. A
wholesale business does not need to account for
sales taxes.
The sales journal has a single amount column.
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Posting from a Single-Column Journal
SALES JOURNAL PAGE
1

ACCOUNTS DATE INVOICE
CUSTOMERS POST. RECEIVABLE DR.
NO. ACCOUNT DEBITED
REF. SALES CR.
20-- Jan. 3 7099 Gabberts
Hardware Company ?
18,600 31 71001 Neals
Department Store ? 4,200
31 Total
40,875
(111/401)
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Invoice
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Sales on Credit
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.

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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.

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Different Types of Credit Sales

• Open-account credit
• Most commonly offered by small businesses granted
  on the basis of personal knowledge of the
  customer
• Business credit cards
• department store chains and gasoline companies,
  provide their own credit cards Cards issued by
  credit card companies

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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.