Chapter
7
Skyline College
7-1
The three types of business operations are:
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.
7-2
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
7-3
Special Journals and Subsidiary
Ledgers
Allow for efficient recording of financial data,
the accounting systems of most businesses
include special journals and subsidiary ledgers
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.
7-4
Journal Flow Chart
Does the transaction involve cash?
YES
NO
Was cash RECEIVED?
YES
Record the
transaction in
the CASH
RECEIPTS
(CRs) Journal
Was inventory PURCHASED?
NO
YES
Record the
transaction in
the CASH
DISBURSEMENTS
(CDs) Journal
Record the
purchase in
the
PURCHASES
Journal (PJ)
Use the CRs and CDs Journals to prepare
the monthly Bank Reconcilation
7-5
NO
Was it a credit SALE?
YES
NO
Record the
Transaction
in the
SALES
Journal (SJ)
Record the
Transaction
In the
GENERAL
Journal (GJ)
Journals Used by
Merchandising Businesses
Type of Journal
Purpose
Sales
To record sales of merchandise on credit
Purchases
To record purchases of merchandise on credit
Cash receipts
To record cash received from all sources
Cash payments
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
7-6
Ledgers Used by
Merchandising Businesses
Content
Type of Ledger
General
Assets, liabilities, owner’s equity, revenue,
and expense accounts
Accounts
receivable
Accounts for credit customers
Accounts
payable
Accounts for creditors
7-7
The Style Shop
Chart of Accounts
ASSETS
101
105
Cash
Petty Cash Fund
REVENUE
109
111
Notes Receivable
Accounts Receivable
401
451
Sales
Sales Returns and Allowances
112
116
Allowance for Doubtful Accounts
Interest Receivable
491
493
Interest Income
Miscellaneous Income
121
126
Merchandise Inventory
Prepaid Insurance
COST OF GOODS SOLD
127
129
Prepaid Interest
Supplies
131
132
Store Equipment
Accumulated Depreciation - Store Equip.
141
142
Office Equipment
Accumulated Depreciation - Office Equip.
501
502
Purchases
Freight In
503
504
Purchases Returns and Allowances
Purchases Discounts
EXPENSES
611
612
Salaries Expense - Sales
Supplies Expense
614
617
Advertising Expense
Cash Short or Over
626
634
Depreciation Expense - Store Equipment
Rent Expense
637
639
Salaries Expense - Office
Insurance Expense
641
643
Payroll Taxes Expense
Utilities Expense
649
651
Telephone Expense
Uncollectible Accounts Expense
OWNER’S EQUITY
657
658
Bank Fees Expense
Delivery Expense
301
302
Mary Amos, Capital
Mary Amos, Drawing
659
691
Depreciation Expense - Office Equipment
Interest Expense
399
Income Summary
693
Miscellaneous Expense
LIABILITIES
201
202
Notes Payable — Trade
Notes Payable — Bank
205
216
Accounts Payable
Interest Payable
221
222
Social Security Tax Payable
Medicare Tax Payable
223
225
Employee Income Tax Payable
Federal Unemployment Tax Payable
227
229
State Unemployment Tax Payable
Salaries Payable
231
Sales Tax Payable
7-8
The Sales Journal
A sales journal is a special journal
used to record sales of merchandise
on credit.
Sales on account only!
7-9
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
GENERAL JOURNAL
Date
20--
DESCRIPTION
Jan. 3
8
11
15
PAGE
POST.
REF.
DEBIT
Accounts Receivable
Sales Tax Payable
Sales
Sold merchandise on credit to
Roy Anderson, Sales Slip 1101
111
231
401
432
Accounts Receivable
Sales Tax Payable
Sales
Sold merchandise on credit to
Cathy Ball, Sales Slip 1102
111
231
401
648
Accounts Receivable
Sales Tax Payable
Sales
Sold merchandise on credit to
Barbara Coe, Sales Slip 1103
111
231
401
756
Accounts Receivable
Sales Tax Payable
Sales
Sold merchandise on credit to
Amalia Rodriguez, Sales Slip 1104
111
231
401
324
7-11
2
CREDIT
32
400
48
600
56
700
24
300
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!
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.
Sales Slip
The Style Shop
400
400
S Harris
32
Roy Anderson
8913 South Hampton Road
Dallas, TX 75232
7-14
Total 432
The Style Shop
2007 Trendsetter Lane
400
Dallas, TX 75268
400
S Harris
Sales Tax
32
Total 432
Roy Anderson
8913 South Hampton Road
Dallas, TX 75232
SALES JOURNAL
SALES
ACCOUNTS
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE
NO.
REF.
DEBIT
20-Jan. 3 1101 Roy Anderson

432
7-15
PAGE
1
SALES TAX
PAYABLE
SALES
CREDIT
CREDIT
32
400
SALES JOURNAL
SALES
ACCOUNTS
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE
NO.
REF.
DEBIT
20-Jan. 3
8
11
15
18
21
28
29
31
31
31
1101
1102
1103
1104
1105
1106
1107
1108
1109
1110
Roy Anderson
Cathy Ball
Barbara Coe
Amalia Rodriguez
Fred Wu
Linda Carter
Kim Ramirez
Mesia Davis
Alma Sanchez
Roy Anderson
Totals










7-16
214
535
642
428
856
321
107
1,070
963
267
5,886
PAGE
1
SALES TAX
PAYABLE
SALES
CREDIT
CREDIT
14
35
42
28
56
21
7
70
63
17
436
200
500
600
400
800
300
100
1,000
900
250
5,450
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.
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
SALES JOURNAL
SALES
SLIP
NO.
DATE
CUSTOMER’S NAME
POST.
REF.
PAGE
ACCOUNTS
RECEIVABLE
DEBIT
SALES TAX
PAYABLE
CREDIT
432
648
32
48
SALES
CREDIT
20--
Jan. 3
8
11
15
18
21
28
29
31
31
1101
1102
1103
1104
1105
1106
1107
1108
1109
1110
31
Roy Anderson
Cathy Ball
Barbara Coe
Amalia Rodriguez
Fred Wu
Linda Carter
Kim Ramirez
Mesia Davis
Alma Sanchez
Roy Anderson
Totals
ACCOUNT
DATE
20-Jan. 31
756
56
DESCRIPTION POST.
REF.
DEBIT
S1
324
810
486
108
1080
972
270
24
60
36
8
80
72
20
300
750
450
100
1000
900
250
5,886
(111)
436
(231)
5,450
(401)
CREDIT
5,450
7-19
400
648
700
ACCOUNT NO.
Sales
1
401
BALANCE
DEBIT
CREDIT
5,450
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
7-20
The Accounts Receivable Ledger
An accounts receivable ledger is a subsidiary
ledger that contains credit customer accounts.


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
7-21
The Accounts Receivable Ledger
NAME
Roy Anderson
ADDRESS
DATE
8913 South Hampton, Dallas, Texas 75232-6002
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
BALANCE
20 -Jan.
1 Balance
3 Sales Slip 1101

S1
432
432
864

The accounts receivable ledger has three money columns.

The BALANCE column is presumed to contain debit amounts.
7-22
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.
SALES JOURNAL
PAGE
SALES
ACCOUNTS
DATE SLIP CUSTOMER’S
POST. RECEIVABLE
NO. ACCOUNT DEBITED REF.
DEBIT
1
SALES TAX
PAYABLE
SALES
CREDIT
CREDIT
20-Jan. 3
NAME
1101

Roy Anderson
432
32
400
Roy Anderson
ADDRESS 8913 South Hampton, Dallas, Texas 75232-6002
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
BALANCE
20 -Jan.
1 Balance
3 Sales Slip 1101

S1
432
7-24
432
864
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 sales return, or

give a sales allowance.
Sales Returns and
Allowances
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.
7-26
Credit Memorandum
When a return or allowance is related to a
credit sale, the normal practice is to issue a
credit memorandum.
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.
7-27
A debit to the Sales Returns and Allowances account is
preferred to making a direct debit to Sales.
Sales Returns and Allowances
Returns
and
Allowances
+
The Sales Returns and Allowances account
is a contra revenue account.
7-28
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
150
Dallas, TX 75268
12
PHONE:
162
7-29
Sales Allowance
Sales Returns and
Allowances
+
150
-
Accounts
Receivable
Sales Tax Payable
12
+
7-30
+
162
QUESTION:
How does a sales allowance
transaction affect the financial
statements?
ANSWER:
Net income is decreased. Assets, liabilities,
and equity are decreased.
7-31
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.
Posting from the General Journal
Date
20-Jan.
NAME
ADDRESS
DATE
20 -Jan.
DESCRIPTION
25
POST.
REF.
Sales Returns and Allowances
Sales Tax Payable
Accounts Rec./Linda Carter
Accepted a return of defective
merchandise,
Credit Memorandum 102;
original sale made on Sales
Slip 1106 of January 21.
451
231
111/
DEBIT
CREDIT
450
36
486
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.
Linda Carter
1819 Belt Line Road, Dallas, TX 75267-6318
DESCRIPTION
1 Balance
21 Sales Slip 1106
25 CM 102
POST.
REF.

S1
J1
DEBIT
CREDIT
BALANCE
486
54
540
54
486
7-33
Reporting Net Sales
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.
7-34
The Style Shop
calculation for net sales
Month Ended January 31, 20--
Sales
Less Sales Returns and Allowances
$25,700
<600>
Net Sales
$25,100
Note: there are no sales discounts
in this problem
7-35
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.
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
=
7-37
ACCOUNTS RECEIVABLE
BALANCE
Schedule of Accounts Receivable
A schedule of accounts receivable is a listing
of all balances of the accounts in the accounts
receivable subsidiary ledger.
The names of all customers with account balances
are listed with the amount of their unpaid balances.
The Style Shop
Schedule of Accounts Receivable
January 31, 20-Roy Anderson
Cathy Ball
Linda Carter
Barbara Coe
Mesia Davis
Kim Ramirez
Amalia Rodriguez
Alma Sanchez
Fred Wu
702
648
54
1296
1021
216
972
972
464
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.
Total
ACCOUNT
DATE
20 -Jan.
6345
Accounts Receivable
DESCRIPTION
1 Balance
23
25
31
31
POST.
REF.

J1
J1
S1
CR1
Account No. 111
DEBIT
CREDIT
162
486
5886
2133
7-39
BALANCE
DEBIT
CREDIT
3240
3078
2592
8478
6345
Credit Sales for a
Wholesale Business
A wholesale business is a manufacturer or
distributor of goods that sells to retail
businesses or large consumers.
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
7-40
Net Price
The list price is the established retail
price.
A trade discount is a reduction from
the list price.
The net price is the list price less all
trade discounts.
7-41
Formula for Net Price
List Price
–
Trade Discounts
=
Net Price
7-42
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
7-43
Single Trade Discount
Suppose the list price of goods is $1,500 and the trade
discount is 40 percent.
List Price
$1,500
x
40%
List price x trade discount
Discount
7-44
$ 600
Single Trade Discount
Suppose the list price of goods is $1,500 and the trade
discount is 40 percent.
List price
$1,500
< 600>
trade discount
Net Price
7-45
$ 900
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.
first discount $1,500 x 25%
=$375
$1,500
<375>
$1,125
<168.75>
second discount $1,125 x 15%
=$168.75
Net price
7-46
$956.25
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
7-47
Sales taxes apply only to retail transactions. A
wholesale business does not need to account for
sales taxes.
SALES JOURNAL
DATE INVOICE
CUSTOMER’S
POST.
NO.
ACCOUNT DEBITED REF.
20-Jan. 3 7099
Gabbert’s Hardware Company 
31 71001
31
Neal’s Department Store
Total

PAGE
ACCOUNTS
RECEIVABLE DR.
SALES CR.
18,600
4,200
40,875
(111/401)
The sales journal has a single amount column.
7-48
1
Posting from a Single-Column Journal
SALES JOURNAL
DATE INVOICE
NO.
20-Jan.
3
31
31
7099
71001
CUSTOMER’S
ACCOUNT DEBITED
POST.
REF.
Gabbert’s Hardware Company
Neal’s Department Store
Total


PAGE
ACCOUNTS
RECEIVABLE DR.
SALES CR.
18,600
4,200
40,875
(111/401)
ACCOUNT
DATE
20-Jan.
Accounts Receivable
DESCRIPTION
1
31
20-Jan.
DEBIT
CREDIT
111
BALANCE
DEBIT
CREDIT
46,700
S1
40,875
87,575
Sales
DESCRIPTION
31
ACCOUNT NO.
Balance
ACCOUNT
DATE
POST.
REF.
ACCOUNT NO.
POST.
REF.
DEBIT
CREDIT
S1
40,875
7-49
1
401
BALANCE
DEBIT
CREDIT
40,875
Invoice
An invoice is a customer billing for
merchandise bought on credit.
7-50
Sales on Credit
Each business must develop credit policies that
achieve maximum sales with minimum losses:

A credit policy that is too tight results in a low level of
losses at the expense of increases in sales volume.

A credit policy that is too lenient may result in increased
sales volume accompanied by a high level of losses.
7-51
A Cost of Doing Business

Even though the credit
investigation is thorough, some
accounts receivable become
uncollectible.

Unexpected business
developments, errors of judgment,
incorrect financial data, and many
other causes may lead to defaults
in payments by customers.
7-52
Different Types of Credit Sales

Open-account credit
Most commonly offered by small businesses
granted on the basis of personal knowledge of
the customer

Business credit cards
department store chains and gasoline companies,
provide their own credit cards Cards issued by
credit card companies
7-53
Bank Credit Cards

Retailers can provide credit
while minimizing or avoiding
the risk of losses from uncollectible
accounts by accepting bank credit cards.

The most widely accepted bank credit cards are
MasterCard and Visa.

Bank credit cards are issued to consumers directly by
banks.
7-54