BUSI 120A – Chapters 10 and 11 – Special Journals
This week we are adding to the Fundamental Accounting Equation and thinking about
merchandising firms - companies which sell merchandise to their customers as
opposed to providing a service like renting a sailboat.
We will be looking at Special Journals: books of original entry in which specialized
types of repetitive transactions are recorded. These include:
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Sales journal (Chapter 10)
Purchases journal (Chapter 10)
Cash receipts journal (Chapter 11)
Cash payments journal (Chapter 11)
Fundamental Accounting Equation for Merchandising Firms
BUSI 120A
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CHAPTERS 10 AND 11
Chapter 10: The Sales Journal and the Purchases Journal – Key Points
1. A merchandising firm must use specific accounts and procedures to record
transactions involving the purchase, handling, and sale of its merchandise.
2. The entries in the sales journal represent sales of merchandise on account
and are posted daily to the accounts receivable ledger. Totals are posted
monthly to the general ledger.
3. The Accounts Receivable account balance (a controlling account), when all the
postings are up to date, should equal the total of all the individual balances of
the charge customers' accounts in the accounts receivable ledger.
4. The entries in the purchases journal represent purchases of merchandise on
account and are posted daily to the accounts payable ledger. Totals are
posted monthly to the general ledger.
5. The Accounts Payable account balance (a controlling account), when all the
postings are up to date, should equal the total of all the individual balances of
the vendors/ suppliers accounts in the accounts payable ledger.
6. The Freight In (Transportation In) account is used to record the cost of
moving the merchandise for resale from the seller to the buyer.
7. Internal control procedures must be followed to help protect the integrity of
the merchandise inventory.
YOU SHOULD BE ABLE TO DO THE FOLLOWING PROCEDURES AFTER COMPLETING
CHAPTER 10:
1. Describe the specific accounts used by a merchandising firm.

The Merchandise Inventory account is an asset account representing the cost of
goods bought for resale.

The Sales Tax Payable account is a liability account representing amounts owed
to each appropriate entity.

The Sales account is a revenue account representing the total sales of
merchandise.

The Sales Returns and Allowances account is a deduction from the Sales
account, representing amounts allowed for returns of merchandise and damaged
goods.

The Sales Discount account is a deduction from the Sales account, representing
amounts deducted for prompt payments.
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CHAPTERS 10 AND 11

The Purchases account is a cost (expense) account representing the costs of
goods bought for resale.

The Purchases Returns and Allowances account is a deduction from the
Purchases account, representing the amounts granted by suppliers for the return of
merchandise or damaged goods.

The Purchases Discount account is a deduction from the Purchases account,
representing amounts suppliers allow for prompt payments.

The Freight In account is a cost representing the transportation charges on
incoming merchandise.
2. Journalize transactions in a sales journal.
The sales journal is used to record sales of merchandise on account only.
3. Post sales journal transactions to an accounts receivable ledger and a general ledger.

During the month, as customers charge merchandise, the amounts must be posted to their
individual accounts as debits and a running balance maintained.

At the end of the month, the total of the amounts charged by customers for purchase of
merchandise must be posted to the general ledger as a Credit to Sales and a Debit to
Accounts Receivable.
4. Prepare a schedule of accounts receivable.
The schedule of accounts receivable consists of a listing of the individual account
balances of the charge customers taken from the accounts receivable ledger.
5. Journalize sales returns and allowances, including credit memorandums and returns involving
sales tax, in a general journal, and post to the accounts receivable and general ledger accounts.

When a customer returns merchandise, or when his or her bill is reduced owing to an
allowance for defective or damaged merchandise, the Sales Returns and Allowances
account is debited and the Accounts Receivable account is credited.

The entry is recorded in the general journal and posted to both the general ledger and the
accounts receivable ledger.
6. Journalize transactions in a three-column purchases journal.
The three-column journal handles the purchase of merchandise on account and freight
charges that are prepaid by the seller and included in the invoice total.
7. Post purchases journal transactions to an accounts payable ledger and a general ledger.
BUSI 120A
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CHAPTERS 10 AND 11

Amounts in the Accounts Payable Credit column are posted daily to the Accounts
Payable ledger.

At the end of the month, the totals are posted to the general ledger as a debit to Purchases,
a debit to Freight In, and a credit to Accounts Payable.
8. Prepare a schedule of accounts payable.
A schedule of accounts payable, listing the balance of each individual creditor’s account,
is prepared from the accounts payable ledger.
9. Journalize transactions involving purchases returns and allowances in a general journal, and
post to the accounts payable and general ledger accounts.

When a credit memo is received for the return of merchandise or as an allowance for
damaged merchandise, the buyer credits Purchases Returns and Allowances.

If the merchandise was bought on account, the buyer debits Accounts Payable. The
transaction is journalized in the general journal.
10. Describe the procedures for handling freight charges on merchandise and other
goods.

The Freight In account is debited for most transportation charges on incoming
merchandise intended for resale.

Delivery Expense is used for the cost of transportation charge on merchandise
sold and being delivered to customers.

Freight costs that apply to assets purchased are added to the asset account which
applies. For example, $300 freight on a large freezer for a restaurant would be
debited to that freezer account— part of the cost of that asset.
BUSI 120A
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CHAPTERS 10 AND 11
Chapter 11: The Cash Receipts Journal and the Cash Payments Journal – Key Points
1. The cash receipts journal is used to record all transactions involving receipts
of cash or increases in cash.
2. The totals of the special columns of the cash receipts journal are posted at
the end of the month to the respective general ledger accounts.
3. Sales Discounts is treated as a deduction from Sales.
4. The cash payments journal is used to record all transactions involving
payments of cash or decreases in cash.
5. The cash discount is based on the total amount of the invoice after deducting
freight charges billed on the invoice and any returns and allowances.
6. The totals of the special columns of the cash payments journal are posted at
the end of the month to the respective general ledger accounts.
7. Purchases Discounts is treated as a deduction from Purchases.
8. A check register can be used in place of a cash payments journal.
9. Transactions involving trade discounts are recorded at the net amounts.
10. The recommended order of posting from the special journals to the subsidiary
ledgers and the general ledger is sales journal, purchases journal, cash
receipts journal, and cash payments journal.
YOU SHOULD BE ABLE TO DO THE FOLLOWING PROCEDURES AFTER COMPLETING
CHAPTER 11:
1. Journalize transactions for a retail merchandising business in a cash receipts journal.

A transaction for a retail merchandising business can be recorded on one line in a cash
receipts journal.

The cash receipts journal usually contains the following columns:
o Date
o Account Credited
o Post. Ref.
o Other Accounts Credit
o Accounts Receivable Credit
o Sales Credit
o Sales Tax Payable Credit
o Credit Card Expense Debit
o Cash Debit
2. Post from a cash receipts journal to a general ledger and an accounts receivable ledger.
BUSI 120A
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CHAPTERS 10 AND 11

The accountant posts daily from the Accounts Receivable Credit column to the individual
charge customers’ accounts in the account receivable ledger.

After posting, the accountant puts a check mark () in the Post. Ref. column.

The accountant also posts the amounts in the Other Accounts Credit column daily and
records that account number in the Post. Ref. column.

The special columns are posted as totals at the end of the month. The accountant then
writes the account numbers in parentheses under the totals. An (X) below the total of the
Other Accounts Credit column shows that amounts are posted individually and the total is
not posted.
3. Determine cash discounts according to credit terms, and record cash receipts from charge
customers who are entitled to deduct the cash discount.

The same cash discount is available to all the supplier’s customers. The amount of the
discount is determined by multiplying the invoice total (excluding freight charges and
any returns and allowances) by the cash discount rate (usually 1 or 2 percent).

The amount of the discount is recorded as a debit to Sales Discount.
4. Journalize transactions in a cash payments journal for a service enterprise.

A cash payment by a service enterprise can be handled on one line in a cash payments
journal.

The cash payments journal usually contains the following columns:
o
o
o
o
o
o
o
Date
Ck. No.
Account Debited
Post. Ref.
Other Accounts Debit
Account Payable Debit
Cash Credit
5. Post from a cash payments journal to a general ledger and an accounts payable ledger.

The accountant posts daily from the Accounts Payable Debit column to the individual
suppliers’ accounts in the account payable ledger.

After posting, the accountant puts a check mark () in the Post. Ref. column.

The accountant also posts the amounts in the Other Accounts Debit column daily and
records that account number in the Post. Ref. column.

The special columns are posted as totals at the end of the month.
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CHAPTERS 10 AND 11

The accountant then writes the account numbers in parentheses under the totals. An (X)
below the total of the Other Accounts Debit column shows that amounts are posted
individually and the total is not posted.
6. Journalize transactions involving cash discounts in a cash payments journal for a
merchandising enterprise.

A cash payment by a merchandising enterprise that includes a purchase discount can be
recorded on one line in a cash payments journal.

The cash payments journal usually contains the following columns:
o Date,
o Ck. No.
o Account Debited
o Post. Ref.
o Other Accounts Debit
o Accounts Payable Debit
o Purchases Discount Credit
o Cash Credit
7. Journalize transactions in a check register.

Transactions can be recorded on one line in a check register. The check register is similar
to the cash payments journal.

However, the check register has an additional column entitled Payee, and instead of a
Cash Credit column there is often a column with the name of the bank (City Bank Credit,
for example).
8. Journalize transactions involving trade discounts.

In transactions involving trade discounts, the trade discounts are deducted from the list
prices to arrive at the selling prices.

Both sellers and buyers record the transactions at the selling prices.
BUSI 120A
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CHAPTERS 10 AND 11