CHAPTER ELEVEN ACCOUNTING FOR SALES AND CASH RECEIPTS

CHAPTER ELEVEN ACCOUNTING FOR SALES AND CASH RECEIPTS

MERCHANDISING BUSINESS § Purchases merchandise from vendors/suppliers and sells that merchandise to customers § Revenue is now from Sales. • Rather than the performance of services

MERCHANDISING BUSINESSES Ø Retailer § Sells to final consumers § Evidenced by: • Cash Register tape • Sales Ticket – One copy given to the customer and the other to the Accounting Department

MERCHANDISING BUSINESSES Ø Wholesaler § Purchases merchandise from manufacturer § Sells to retailers • Usually “on account” § Sales Invoice generated for each sale • One to customer • One to the Accounting Department • One shipped with merchandise

CREDIT MEMORANDUM § Issued by seller indicating the customer’s Accounts Receivable account has been credited for the amount of a: • Return - Merchandise returned for a refund • Allowance - Customer is granted a price reduction because of defect or other problems with the merchandise. § One copy of memo to the customer § One copy sent to Accounting Department

MERCHANDISE REVENUE ACCOUNTS SALES TAX PAYABLE SALES RETURNS & ALLOWANCES SALES DISCOUNTS

SALES ACCOUNT REVENUE account used to record sales of merchandise. Similar to the Fees account used by a service business SALES DR. CR. + The account is credited for the selling price of merchandise sold.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Cash Sales PR DEBIT CREDIT 100 00 Made cash sale 5 6 7 8 9 10 11 Example: Made $100 cash sale 100 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Cash Sales PR DEBIT CREDIT 100 00 Made cash sale 5 6 7 8 9 10 11 What if this sale had been made on account? 100 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Accts. Rec. /Customer PR DEBIT CREDIT 100 00 5 6 7 8 9 10 11 We would debit the Accounts Receivable account instead of cash.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Accts. Rec. /Customer PR DEBIT CREDIT 100 00 5 6 7 8 9 10 11 Customers name is entered after Accounts Receivable in the journal.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Rec. /Customer Sales PR DEBIT CREDIT 100 00 Made credit sale The Sales account is credited because a sale has been made (even though the business has not yet been paid for the merchandise). 100 00

SALES TAX PAYABLE LIABILITY account used to record the taxes imposed on sales and owed to the taxing authority. SALES TAX PAYABLE DR. CR. + The account is credited for the amount of tax imposed on the sales.

SALES TAX PAYABLE LIABILITY account used to record the taxes imposed on sales and owed to the taxing authority. SALES TAX PAYABLE DR. CR. + The account is debited when the tax is paid to the proper taxing authority.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: A cash sale for $100 plus 5% sales tax.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Cash PR DEBIT CREDIT 105 00 Sales Tax would be $5 ($100 x 5%) Therefore, cash received would be $105. ($100 selling price + $5 tax)

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Cash Sales PR DEBIT CREDIT 105 00 Sales is credited for the selling price, not the amount of cash received. 100 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Cash Sales Tax Payable Made cash sale $5 sales tax is credited to Sales Tax Payable. 105 00 100 00 5 00

SALES RETURNS & ALLOWANCES CONTRA-REVENUE account used to record sales returns and sales allowances. Shown as a deduction from Sales on the Income Statement SALES RETURNS & ALLOWANCES DR. CR. + The account is debited when customer returns merchandise or an allowance is granted.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Credit customer, Susan Chang, returns printer cartridges (selling price $40 plus $2 sales tax).

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Sales Returns &Allowances PR DEBIT CREDIT 40 00 Sales Returns & Allowances is debited for the selling price.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Sales Returns &Allowances Sales Tax Payable is debited for the tax of $2. 40 00 2 00

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION PR DEBIT CREDIT Sales Returns &Allowances Sales Tax Payable Accts. Receivable/Chang Issued credit memo for returned merchandise 6 7 8 9 10 11 Accounts Receivable is credited for $42. 40 00 2 00 42 00

SALES DISCOUNTS CONTRA-REVENUE account used to record discounts given to customers who buy merchandise on account to encourage prompt payment. SALES DISCOUNTS DR. CR. + The account is debited for the amount of the Cash Discount at the time of payment.

CREDIT TERMS 2/10, n/30 2% discount off sales price

CREDIT TERMS 2/10, n/30 If paid within 10 days

CREDIT TERMS 2/10, n/30 Or the total amount is due

CREDIT TERMS 2/10, n/30 In 30 days

CREDIT TERMS 1/10, n/30 1% off if paid in 10 days or Total amount due in 30 days.

CREDIT TERMS 2/eom, n/60 2% off if paid before the end of the month or Total amount due in 60 days.

CREDIT TERMS 3/10 eom, n/60 3% off if paid within 10 days after the end of month or Total amount due in 60 days.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Merchandise was sold for $100 with credit terms of 2/10, n/30, and cash is received within the discount period.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Cash Sales Discounts 5 6 7 8 9 10 11 $100 sale x 2% discount 98 00 2 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Cash Sales Discounts Accts. Receivable/Cust. Received cash on account PR DEBIT CREDIT 98 00 2 00 100 00

Income Statement Sales Less: Sales returns and allowances Sales discounts $200 140 Sales Returns & Allowances and Sales Discounts are deducted from Sales in the Revenue section of the Income Statement. $38, 500 340

Income Statement Sales Less: Sales returns and allowances Sales discounts Net Sales $200 140 $38, 500 340 $38, 160

POSTING SALES TRANSACTIONS IN THE GENERAL LEDGER § In the ledger account: • • Step 1: Enter the date. Step 2: Enter the amount of the transaction. Step 3: Update the balance. Step 4: Enter the journal page number. § In the journal: • Step 5: Enter the ledger account number.

ACCOUNTS RECEIVABLE LEDGER § A separate “subsidiary” ledger § Individual accounts receivable accounts for each customer § Often numbered § Filed either alphabetically or numerically § Accounts Receivable account in the general ledger is the “controlling account. ”

POSTING TO THE ACCOUNTS RECEIVABLE LEDGER § In the Accounts Receivable ledger: • • Step 1: Enter the date. Step 2: Enter the amount. Step 3: Enter the new balance. Step 4: Enter the journal page number. § In the journal: • Step 5: Enter a slash (/) followed by a check mark (+) in the PR column.

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION PR DEBIT CREDIT April 4 Accts. Receivable/Lorenzo 1, 596 00 Sales Tax Payable Sale No. 133 c 5 6 7 8 9 10 11 Let’s review the posting for this transaction. 1, 520 00 76 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Accts. Rec. /Lorenzo PR DEBIT CREDIT 1, 596 00 Sales Tax Payable Sale No. 133 c A $1, 596 debit is posted to the General Ledger Accounts Receivable account. 1, 520 00 76 00

FOUR-COLUMN ACCOUNT Account: DATE ITEM 20 -Apr. 1 Balance 4 Account No. 122 BALANCE CR. DR. CR. ACCOUNTS RECEIVABLE PR DR. 12, 000 J 8 1, 596 13, 596 This entry is posted in the same manner as all other general ledger postings.

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Accts. Rec. /Lorenzo PR DEBIT CREDIT 122 1, 596 00 Sales Tax Payable Sale No. 133 c 5 6 7 8 9 10 11 Accts. Receivable account number is entered into the PR column. 1, 520 00 76 00

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION April 4 Accts. Rec. /Lorenzo PR DEBIT CREDIT 122 1, 596 00 Sales Tax Payable Sale No. 133 c 5 6 7 8 9 10 11 Now we need to post to the individual customer account. 1, 520 00 76 00

Name: ACCOUNTS RECEIVABLE LEDGER Enrico Lorenzo Address: 5240 Tousley Court, Indianapolis, IN 46224 -5678 DATE 20 -Apr. 4 ITEM PR DEBIT J 8 CREDIT 1, 596 Date is entered, Amount is recorded, Balance is updated, and Journal page number is referenced. BALANCE 1, 596

GENERAL JOURNAL 1 2 3 4 5 DATE DESCRIPTION May 5 Sales Returns &Allow. Sales Tax Payable Accts. Rec. /S. Chang PR DEBIT CREDIT 40 00 2 00 Returned Merchandise Credit Memo #72 6 7 8 9 10 11 Now let’s look at the posting for a Sales Return entry. 42 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 5 Sales Returns &Allow. Sales Tax Payable Accts. Rec. /S. Chang PR DEBIT CREDIT 40 00 401. 1 2 00 Returned Merchandise Credit Memo #72 Sales Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 42 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 5 Sales Returns &Allow. Sales Tax Payable Accts. Rec. /S. Chang PR DEBIT CREDIT 40 00 401. 1 231 2 00 Returned Merchandise Credit Memo #72 Sales Tax Payable is also posted in the normal manner. Its account number is recorded in the PR column. 42 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 5 Sales Returns &Allow. PR DEBIT CREDIT 40 00 401. 1 Sales Tax Payable 231 Accts. Rec. /S. Chang 122 / / 2 00 Returned Merchandise Credit Memo #72 The $42 credit is posted to the Accounts Receivable controlling account and to the Subsidiary ledger account for S. Chang. 42 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 14 Cash PR DEBIT CREDIT 1, 596 00 Accts. Rec. /E. Lorenzo Received cash on account Cash Receipt transactions are posted in a similar manner. 1, 596 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 14 Cash PR DEBIT CREDIT 101 1, 596 00 Accts. Rec. /E. Lorenzo Received cash on account Cash is posted as usual. 1, 596 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 14 Cash PR DEBIT CREDIT 101 1, 596 00 Accts. Rec. /E. Lorenzo 122/ / 1, 596 00 Received cash on account The credit is posted to the Accounts Receivable controlling account and to the Subsidiary ledger account for E. Lorenzo.

BANK CREDIT CARD SALES § Similar to cash sales because cash is available to the business as soon as an electronic deposit is made at the end of the day § Business receives amount of sale. o Less a processing fee

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 6 Cash PR DEBIT CREDIT 100 80 Made a bank credit card sale of $100 (plus $5 tax). The seller will receive cash of $100. 80. ($105 - 4% fee)

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 6 Cash Bank Credit Card Exp. PR DEBIT CREDIT 100 80 4 20 Bank Credit Card Expense is debited for the processing fee.

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 6 Cash Bank Credit Card Exp. Sales Tax Payable Made Credit Card Sale PR DEBIT CREDIT 100 80 4 20 100 00 5 00

SCHEDULE OF ACCOUNTS RECEIVABLE § Prepared to verify that the sum of the accounts receivable ledger balances equals the Accounts Receivable balance § Listing of customers and their balances § Usually prepared at the end of the month § Total of the balances listed is compared with the balance in the Accounts Receivable account.

Northern Micro Schedule of Accounts Receivable April 30, 20 -Helen Avery Susan Chang Heidi Schwitzer Ken Ulmet Vivian Winston $2, 302 651 3, 563 3, 315 4, 500 $14, 331 This should be the balance in the Accounts Receivable controlling account.

ERRORS § If the Schedule of Accounts Receivable total and the Accounts Receivable balance do not agree: o Step 1 Verify the total of the schedule. o Step 2 Verify the postings to the accounts receivable ledger. o Step 3 Verify the postings to the Accounts Receivable in the general ledger.