Chapter 7 lecture notes
In the previous chapters you were dealing with a service business; in chapter
7 you are introduced to the transactions used in a merchandising business.
Several new accounts are introduced: sales - which is the new revenue
account used to record sale of merchandise, sales tax payable - which is the
new liability account used to record sales tax collected from customers
which will be paid to the state at a later date (because the money does not
belong to the business – but to the state – it is a liability), and sales returns
and allowances – which is a new contra-revenue account. Retail businesses
must account for inventory that is purchased, sold, and on hand; special
journals and subsidiary ledgers facilitate this process.
The sales journal is a special journal which is only used to record sales of
merchandise on credit. The sales journal saves the repetition that would be
involved if these transactions were all recorded in the general journal; it
eliminates the need for daily postings to the Accounts Receivable, Sales, and
Sales Tax Payable ledger accounts at the end of each day. Instead, the
totals are posted at the end of the month – note how this is done in figure
7.4 on page 205. Remember – the debits must still equal the credits, even
though the format of the journal is slightly different – see page 203 for an
example, note that it is important to include the sales slip or invoice number
for reference.
The accounts receivable ledger (A/R) is also introduced – this is a subsidiary
ledger which is a supporting record showing individual account activity. The
general ledger is the control account because the total from the A/R ledger
should equal the A/R balance in the general ledger. The subsidiary ledger is
updated daily so that at any given time the business can see who owes them
money. Note in figure 7.5 on page 208 that there is a check mark in the
posting reference column of the sales journal – this is done to check off
that the subsidiary ledger has been updated.
When cash is paid on a customer’s account it is recorded in the cash
payments journal, which will be introduced in chapter 9.
Sales Returns and Allowances is a contra revenue account used to record
returns. When a customer returns something, this account is debited. Sales
is like the parent account, and sales returns are subtracted from this
account in order to get net sales. If a return is recorded in the general
journal (which it is unless there is a special journal specifically for sales
returns and allowances), then posting to both the general ledger and the
subsidiary ledger would be done at the end of the day.
The schedule of A/R is shown in figure 7.10 on page 214; this is important
for the business in keeping track of how much each person owes them.
The final section of the chapter introduces special topics in merchandising,
some things to note are that many businesses prefer bank credit card sales
(such as Master Card and Visa) because these can be treated as cash sales
because the cash is guaranteed as soon as an authorization number is
received. Also note in figure 7.19 on page223 – when they show the amount
of discount; this is referring to the fact that the discount is the amount
paid by the state to the business for collecting the sales tax; this discount
is considered income.