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Chapter. 7. Skyline College. A service business is a business that sells services. . A merchandising business is a business that sells goods purchased for resale. . A manufacturing business is a business that sells goods that it has produced. . The three types of business operations are:.

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  1. Chapter 7 Skyline College

  2. A service business is a business that sells services. A merchandising business is a business that sells goods purchased for resale. A manufacturing business is a business that sells goods that it has produced. 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. A special journal is a journal used to record only one type of transaction. A subsidiary ledger is a ledger dedicated to accounts of a single type. Special Journals and Subsidiary Ledgers Allow for efficient recording of financial data, the accounting systems of most businesses include special journals and subsidiary ledgers

  5. 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)

  6. Type of Journal Purpose Journals Used by Merchandising Businesses To record sales of merchandise on credit Sales To record purchases of merchandise on credit Purchases Cashreceipts To record cash received from all sources Cashpayments 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

  7. Content Type of Ledger Ledgers Used by Merchandising Businesses General Assets, liabilities, owner’s equity, revenue, and expense accounts Accounts receivable Accounts for credit customers Accounts for creditors Accounts payable

  8. The Style ShopChart 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 OWNER’S EQUITY 301 Mary Amos, Capital 302 Mary Amos, Drawing 399 Income Summary

  9. A sales journal is a special journal used to record sales of merchandise on credit. Sales on account only! The Sales Journal

  10. 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

  11. GENERAL JOURNAL PAGE 2 Date 20-- DESCRIPTION POST. REF. DEBIT CREDIT Jan. 3 Accounts Receivable Sales Tax Payable Sales Sold merchandise on credit to Roy Anderson, Sales Slip 1101 111 231 401 432 32 400 8 Accounts Receivable Sales Tax Payable Sales Sold merchandise on credit to Cathy Ball, Sales Slip 1102 111 231 401 648 48 600 11 Accounts Receivable Sales Tax Payable Sales Sold merchandise on credit to Barbara Coe, Sales Slip 1103 111 231 401 756 56 700 15 Accounts Receivable Sales Tax Payable Sales Sold merchandise on credit to Amalia Rodriguez, Sales Slip 1104 111 231 401 324 24 300

  12. 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.

  14. Sales Slip The Style Shop 400 400 S Harris 32 Total 432 Roy Anderson 8913 South Hampton Road Dallas, TX 75232

  15. SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT 20-- Jan. 3 1101 Roy Anderson  432 32 400 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

  16. SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S 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

  17. 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. DR=CR

  19. SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT 20-- Jan. 3 1101 Roy Anderson 432 32 400 8 1102 Cathy Ball 648 48 648 11 1103 Barbara Coe 756 56 700 15 1104 Amalia Rodriguez 324 24 300 18 1105 Fred Wu 810 60 750 21 1106 Linda Carter 486 36 450 28 1107 Kim Ramirez 108 8 100 29 1108 Mesia Davis 1080 80 1000 31 1109 Alma Sanchez 972 72 900 31 1110 Roy Anderson 270 20 250 ACCOUNT Sales ACCOUNT NO. 401 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 31 S1 5,450 5,450 31 Totals 5,886 436 5,450 (111) (231) (401)

  20. 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

  21. An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts. 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

  22. 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.

  23. Posting a Credit Sale Each credit sale recorded in the sales journal is posted to the appropriate customer’s 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.

  24. SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S 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

  25. 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 salesreturn, or • give a sales allowance.

  26. A sales return is a firm’s acceptance of a return of goods from a customer. A sales allowance is a reduction in the price originally charged to customers for goods or services. Sales Returns and Allowances

  27. A credit memorandum is a note verifying that a customer’s account is being reduced by the amount of a sales return or sales allowance plus any tax that may have been involved. Credit Memorandum When a return or allowance is related to a credit sale, the normal practice is to issue a credit memorandum.

  28. Returns and Allowances + 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.

  29. 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 - 12 - 162 - + +

  31. QUESTION: How does a sales allowance transaction affect the financial statements? ANSWER: Net income is decreased. Assets, liabilities, and equity are decreased.

  32. Posting a Sales Return or Allowance Each sales return or allowance must be posted from the journal to the: General Ledger A/R and customer’s account in the subsidiary A/R ledger.

  33. Posting from the General Journal 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. 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

  34. Net sales is the difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account and the Sales Discounts account. Reporting Net Sales

  35. The Style Shop calculation for net sales Month Ended January 31, 20-- Sales Less Sales Returns and Allowances Net Sales $25,700 <600> $25,100 Note: there are no sales discounts in this problem

  36. 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.

  37. 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 =

  38. A schedule of accounts receivable is a listing of all balances of the accounts in the accounts receivable subsidiary ledger. Schedule of Accounts Receivable The names of all customers with account balances are listed with the amount of their unpaid balances.

  39. 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 1623078 25 J1 4862592 31 S1 5886 8478 31 CR1 21336345

  40. A wholesale business is a manufacturer or distributor of goods that sells to retail businesses or large consumers. 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

  41. A trade discount is a reduction from the list price. The list price is the established retail price. The net price is the list price less all trade discounts. Net Price

  42. Formula for Net Price List Price – Trade Discounts = Net Price

  43. 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

  44. List Price $1,500 x 40% 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

  45. List price $1,500 < 600> Single Trade Discount Suppose the list price of goods is $1,500 and the trade discount is 40 percent. trade discount $ 900 Net Price

  46. second discount $1,125 x 15% =$168.75 first discount $1,500 x 25% =$375 $1,500 <375> $1,125 <168.75> 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

  47. 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

  48. SALES JOURNAL PAGE 1 ACCOUNTS DATE INVOICE CUSTOMER’S POST. RECEIVABLE DR. NO. ACCOUNT DEBITED REF. SALES CR. 20-- Jan. 3 7099 Gabbert’s Hardware Company  18,600 31 71001 Neal’s Department Store  4,200 31 Total 40,875 (111/401) 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.

  49. ACCOUNT Sales ACCOUNT NO. 401 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 31 S1 40,875 40,875 ACCOUNT Accounts Receivable ACCOUNT NO. 111 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 1 Balance 46,700 31 S1 40,875 87,575 Posting from a Single-Column Journal SALES JOURNAL PAGE 1 ACCOUNTS DATE INVOICE CUSTOMER’S POST. RECEIVABLE DR. NO. ACCOUNT DEBITED REF. SALES CR. 20-- Jan. 3 7099 Gabbert’s Hardware Company  18,600 31 71001 Neal’s Department Store 4,200 31 Total 40,875 (111/401)

  50. An invoice is a customer billing for merchandise bought on credit. Invoice

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