7–11-1 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Accounting for Sales, Accounts Receivable, and Cash ReceiptsAccounting for Sales, Accounts Receivable, and Cash Receipts

Section 1: Understanding Merchandising Companies

Chapter

7

Section Objectives

1. Record sales on account, credit card sales, sales returns, and cash receipt transactions in a general journal

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Meet Maxx-Out Sporting GoodsMeet Maxx-Out Sporting Goods

• Maxx-Out Sporting Goods is a merchandising business that sells the latest sporting goods and sportswear for men, women, and children.

• It is a retail business.

• Max Ferraro is the sole proprietor of the firm.

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Accounts of a Merchandising CompaniesAccounts of a Merchandising Companies

<< Insert the table>>

PDF page 191

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The journal entry to record a sale of $500 for cash on January 2

Objective 1Recording Sales for Cash and On Account

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Recording Sales for Cash and On AccountRecording Sales for Cash and On Account

On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record the sale

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Recording Sales for Cash and On AccountRecording Sales for Cash and On Account

The journal entry records Roy Anderson’s payment of the amount due on January 31.

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Recording Sales with Sales Tax Payable for Cash and On Account

Recording Sales with Sales Tax Payable for Cash and On Account

The journal entry to record a sale of $500 plus tax for cash follows.

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Recording Sales with Sales Tax Payablefor Cash and On Account

Recording Sales with Sales Tax Payablefor Cash and On Account

The journal entry to record the sale of merchandise on credit

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Sales SlipSales Slip

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If something is wrong with the goods sold, the firm may

• take a sales return, or

• give a sales allowance.

Recording Sales Returns and Sales Allowances

Recording Sales Returns and Sales Allowances

A cash refund is given in the case of a cash sale

A credit memorandum is given in the case of a credit sale

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Sales Returns and Allowances

Returns and

Allowances

The Sales Returns and Allowances account is debited to record returns and allowances.

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The journal entry to record a cash refund

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Credit MemorandumCredit Memorandum

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Sales Returns and Allowances

200

Accounts ReceivableSales Tax Payable

216 16

Sales Allowance

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• 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

Advantages of Credit Sales

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.

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Credit PoliciesCredit Policies

• Tight credit policies results in a low level of losses.

• Lenient credit policies may result in increased sales

volume with a high level of losses.

Each business must develop well-balanced credit policies:

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• Open-account credit

• Business credit cards

• Bank credit cards

• Cards issued by credit card companies

Types of Credit SalesTypes of Credit Sales

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Open-account credit sales and business credit card sales are accounted for as sales on credit.

Open-account creditOpen-account credit

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Accounting for Credit Card SalesAccounting for Credit Card Sales

• Sales made to customers using bank credit

cards, such as MasterCard and VISA are treated

as cash sales.

• The processing fees charged by the credit card

company are debited to the Credit Card Expense

account.

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Maxx-Out Sporting Goods sells merchandise on January 15 totaling $900 to customers using bank credit cards, plus 8 percent sales tax. The bank credit card company charges a 3 percent discount fee.

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Journal entry to record the sales made to customers using bank credit cards on January 15.

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Credit Card CompaniesCredit Card Companies

• Sales to customers using nonbank credit cards such

as American Express and Diners Club are accounted

for as sales on account.

• Nonbank credit cards usually take a few days to pay

the seller.

• The amount remitted to the seller is net of the

discount fee.

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• Maxx-Out Sporting Goods sells merchandise on

January 16 totaling $1,000 to customers paying with

American Express, plus 8 percent sales tax.

• American Express charges a 7 percent discount fee.

• The discount withheld by American Express would be

$75.60 ($1,080.00 X 7%).

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Journal entry to record the sales on January 16 and the subsequent payment on January 23 by American Express

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Accounting for Sales, Accounts Receivable, and Cash ReceiptsAccounting for Sales, Accounts Receivable, and Cash Receipts

Section 2: Special Topics in Merchandising

Chapter

7

Section Objectives2. Compute trade discounts.

3. Compute and record cash discounts on sales.

4. Post from the general journal to the general ledger accounts and to the subsidiary ledger.

5. Prepare a schedule of accounts receivable.

6. Record the payment of sales taxes.

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The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers.

However, many wholesalers offer

• Cash discounts

• Trade discounts

Objective 2 Computing Trade Discounts

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Modern Sportsman, a wholesaler, records the sale and subsequent payment received follow.

Objective 3 Compute and record cash discounts on sales

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A customer returning merchandise and paying within the discount period is only entitled to a cash discount on the balance owed after the return.

Cash Discounts on Sales, with Sales Returns

Cash Discounts on Sales, with Sales Returns

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Reporting Net SalesReporting Net Sales

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The Accounts Receivable LedgerThe Accounts Receivable Ledger

• The accounts receivable ledger has three money columns.

• The BALANCE column is presumed to contain debit amounts.

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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 customer’s account

Objective 4 Posting from the General Journal

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• The use of an accounts receivable ledger does not eliminate the need for the Accounts Receivable account in the general ledger.

• However, the Accounts Receivable account (in the General Ledger) is now considered a control account.

Objective 5Prepare a schedule of accounts receivable

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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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Prepare a schedule of accounts receivable

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At the end of each month, after all the accounts have been posted, Maxx-Out Sporting Goods prepares the sales tax return.

Three accounts are involved:

• Sales Tax Payable

• Sales

• Sales Returns and Allowances

Objective 6 Record the payment of sales taxes

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Sales Tax Due

8% Sales Tax Rate

Taxable Gross Sales for January $25,000.00

x 0.08

$ 2,000.00

Sales Tax Computation

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Haddock • Price • Farina

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College AccountingA Contemporary Approach, 2ndT Edition