Chapter 14
The Operating Cycle of a
Merchandising Business

 Retailer – a business that sells to the final user
(consumer).
 Wholesaler – a business that sells to retailers.
Pg 380
New and Different
Accounts
 Change Fund
 Petty Cash Fund
 Allowance for
Uncollectible Accounts
 Notes
Receivable/Payable
 Interest Receivable
 Merchandise Inventory
 Prepaid Insurance
 Delivery Equipment
 Accumulated
Depreciation

• Bankcard Fees
Expense
• Cash Short and
Over
• Depreciation
Expense
• Insurance
• Interest Expense
• Loss/Gain on
Disposal of Plant
Assets
• Uncollectible
Accounts Expense
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Discount on Notes Payable
Sales Tax Payable
Capital Stock
Retained Earnings
Sales
Sales Discount
Sales/Purchases Returns
and Allowances
Interest Income
Purchases
Transportation In
Purchases Discount
Pg 381

Pg 381
Accounts Used by a
Merchandising
Business
 Merchandise – goods bought for resale.

 Inventory – merchandise on hand for resale
 Merchandise Inventory Account –
 Asset Account
 Increased with a debit and decreased with a credit
 Sales Account – When a retailer sells goods to a
customer the amount of the merchandise sold is
recorded in the Sales account.
 Sales is a revenue account
 Increase with a credit and decrease with a debit
 Both cash sales and sales on account are recorded here
Pg 382
Analyzing Sales
Transactions

 Sales on account
 Credit cards (store and bank)
 Sales Slip – a form that lists date of sale, customer account
identification and description, quantity, and price of the items
sold.
 Sales slips are pre-numbered to help businesses keep track of
all sales made on account
 Sales Tax – most states and some cities tax the retail sale of
goods and services.
 Sales taxes are periodically sent to the state (or city). Until they are
sent, the business holds them in a Sales Tax Payable account.
 Credit Terms – The sales slip usually has a spot for credit terms
on it. n/30 means net amount due in 30 days
Pg 385
The Account Receivable
Subsidiary Ledger

 Small businesses with few Accounts Receivable
accounts usually list them individually in the
General Ledger. Large businesses with many
Accounts Receivable accounts keep a separate
Accounts Receivable Subsidiary Ledger with the
individual accounts listed and then have an
Accounts Receivable (controlling account) listed in
the General Ledger that is a total of all individual
accounts in the subsidiary ledger.
Pg 385
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Pg 387
Sales Returns and
Allowances

 Sales Return – Any merchandise returned for credit
or cash refund
 Sales Allowance – a price reduction granted for
damaged goods kept by the customer.
 Credit Memorandum – If the sales return or
allowance occurs on a charge sale, the business
usually prepares a credit memo. It lists the details of
a sales return or allowance and the customer’s
account is credited for the amount returned or
allowed.
Pg 388

• Sales Returns and Allowances Account – decreases the total
revenue earned by a business.
• Contra Account – an account that offsets or decreases another
account
• Sales Returns and Allowances is a contra account to
Sales
• Contra accounts have the opposite normal balance sides
as the accounts they offset.
Pg 389
Journalizing a Return from
an On Account Sale

Pg 390
the
Accounts
 Receivable
Subsidiary
Ledger
Pg 391
Cash Transactions

 Cash Receipt – a transaction in which money is
received by a business.
 Cash Sales – full payment at the time of sale
 Charge Customer Payments – When a customer comes
in to pay on their account, the employee prepares a
receipt. The receipt number is the source document.
 Bankcard Sales – the bank pays the store and then the
bank collects at a later date from the customer
 Other Cash Receipts – bank loans, sale of assets
Pg 393
Cash Discounts
 Cash discount or Sales discount is the amount a

customer can deduct from the amount owed for
Pg 395
purchased merchandise if payment is made within a
certain time. This is to encourage customers to pay
promptly.
 2/10, n/30 means 2% discount it paid within 10 days if not
the entire amount is due in 30 days.
1. Merchandise Sold X Discount Rate = Discount
$1500
X
.02
= $30
2. Sales Slip Amount - Discount Amount = Amount Paid Within Discount Period
$1500
$30
=
$1470
Payment from a Charge
Customer

Pg 396
Cash Discount
Payments

Pg 397
Cash Sales

Pg 398
Bankcard Sales
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Pg 399
Other Sales

Pg 400
Pg 400
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