Chapter Five Sales and Sales Journal
I.
Learning objectives
After completing this session, students should be able to
1. Describe the operating cycle of a merchandising business;
2. Define special journals and explain their usefulness;
3. Account for the merchandising transactions related to the sales;
4. Define sales discount and understand the usefulness of cash discount;
5. Define subsidiary ledgers and explain the usefulness of accounts receivable
ledger;
6. Understand the double-posting procedures;
7. Account for sales returns and allowances;
8. Understand how to post directly from sales invoices --- a Chinese practice
II. Lecture notes
1. Service-type business vs. merchandising business
The operating cycle of a merchandising business
Cash
Purchase of
Merchandise (goods for resale)
Collection of
receivable
Cash
sales
Accounts
receivable
Inventory
Credit sales
2. Fundamental equation of a merchandising business
Assets
=
Merchandise
Inventory
+
-
Liabilities + Owner’s equity + Revenue Sales tax
Sales
Payable
- +
+
Sales returns &
Allowance
+
-
Sales discount
+
-
Expenses
Purchases
+
Purchase
returns &
allowances
- +
Purchase discount
-
+
5-1
(1) Explain merchandise inventory account – goods for resale
Example: chairs and desks sold by a furniture store
A delivery van disposed of by a furniture store is not merchandise.
(2) What is sales tax payable?
 Amount of tax paid by the customers to the retailer, who will later pay the
collected taxes to the taxation authorities.
 In the U.S., sales tax is levied on retail sales of goods and services, but not
on wholesalers.
3. Explain contra-revenue accounts and contra accounts of purchases
(1) Sales returns and allowances
Returns: 100% refund of the purchase price
Allowances: partial refund of the purchase price (usually for unsatisfactory quality,
especially for minor defects)
Why use a separate Sales returns and allowances account rather than merely
debiting the sales?
 Using a separate contra-revenue account enables management to see both the
total amount of sales and the amount of sales returns. The relationship
between these two amounts gives management an indication of customer
satisfaction with the merchandise.
(2) Sales discount
 Different types of discount
A. trade discount --- every customer can enjoy this discount, regardless of
payment terms
B. quantity discount
C. cash discount --- offered to charge customers who pay their accounts
earlier within the credit period; aims to speed up the collection of accounts
receivable.
 Sales discount is cash discount
Example: Sold good for $100 on credit, credit terms: 2/10, n/30
Accounts receivable
Sales
+
+
100
100
If payment is made within 10 days after the invoice date,
Accounts receivable
Cash
Sales discount
+
+
+
100
98
2
If payment is made after the tenth day, but within the credit period
Accounts receivable
Cash
+
+
100
100
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 Cost of foregoing cash discount
Using the trade creditor’s money for 20 more days, the cost is 2%, if
converted into annual interest rate, it would be about 36% per annum. It is
better to borrow money from banks to pay the trade creditor earlier so as to
enjoy the benefits.
(3) Purchase returns and allowances
 Gives management an indication of the quality of merchandise.
(4) Purchase discount
 cash discount viewed on the buyer side
4. Special journals
 P.113, explain the conditions under which these special journals are used.
 Advantages of special journals
--- Transactions are recorded faster and more efficiently;
--- Many special journals may be in operation at one time, further increasing
the company’s ability to handle a large volume of transactions;
--- Automation may reduce the risk of errors;
--- Employees maintaining special journals generally do not need expertise in
accounting.
 General journal is used when transactions can not be handled by special
journals.
5. Sales journal (explain the sales journal on pages 114-115)
6. Posting from the sales journal
(1) Subsidiary ledger --- Accounts receivable ledger
General ledger (controlling account is accounts receivable)
Accounts receivable ledger
Co. A
Co. B Co. C
Co. D
 Why use subsidiary ledgers?
--- general ledger accounts provide a useful overview of a company’s financial
activities, but they do not provide much of the detailed information needed by
managers and other company employees in daily business operations.
--- An accounts receivable ledger contains a separate account for each credit
customer. It provides the information used in billing customers and in
reviewing their creditworthiness. It includes information on the dates and
amounts of past charges and payments, the current balance owed, and the
customer’s billing address.
 Without account number
 Credit customers are listed according to their alphabetical order.
5-3
(2) Posting procedures
 Posting journal entries on a daily basis to the accounts receivable ledger
(explain the “√” sign in the posting reference column)
 Posting the total of credit sales from the sales journal to the general ledger at
the end of month.
 Explain the posting procedures on Pages 117-118.
(3) Preparing a schedule of accounts receivable
7. Sales returns and allowances
(1) Credit sales
Accounts receivable
Sales
+
+
xxx
xxx
(2) Issue a credit memo to the credit customer
Accounts receivable
Sales returns and allowances
+
+
xxx
xxx
(3) If a customer has returned part of the merchandise, a discount may be taken only
on the gross amount owned after the return.
Example: sold merchandise on credit for 1000, 2/10, n/30
Accounts receivable
1000
Sales
1000
Sales returns and allowances 200
Accounts receivable
200
Cash
784 [(1000-200) x 98%]
Sales discount
16
Accounts receivable
800
8. Posting directly from sales invoices
(1) Post on a daily basis directly from the sales invoices to the accounts receivable
(using invoice number)
(2) Bring the accounts receivable (controlling account) up to date by totaling all the
invoices, and make a general journal entry
9. Assignment: p.128, problem 3
5-4