Chapter 7 - Accounting for Sales and Accounts Receivable

Wholesale business

A business that manufactures or distributes goods to retail businesses or large consumers such as hotels or hospitals.

Retail Business

A business that sells directly to individual consumers

Merchandising Business

A business that sells good purchases for resale

Manufacturing Business

A business that sells goods that it produced

Service Business

A business that sells services

Sales Returns and Allowances

A contra revenue account where sales returns and sales allowances are recorded; sales and returns are subtracted from sales to determine net sales

Invoice

A customer billing for merchandise bought on credit

Sales Return

A firm's acceptance of returns of good form a customer

Special Journal

A journal used to record only one type of transaction

Subsidiary Ledger

A ledger dedicated to accounts of a single type and showing details to support a general ledger account

Credit Memo

A note verifying that a customer's accounts is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved.

Trade Discount

A reduction from list price

Sales Allowance

A reduction in the price originally charged to customers for goods or services

Sales Journal

A special journal used to record sales of merchandise on credit

Accounts Receivable Ledger

A subsidiary ledger that contains credit customer accounts

Open-account Credit

A system that allows the sales of services or goods with the understand that payment will be made at a later date

8) Record credit card sales in appropriate journals

Credit sales are common, and different credit arrangements are used. Businesses that have few transactions with credit card companies normally record these transactions in the sales journal by debiting the usual Accounts Receivable account in the general ledger and crediting the same Sales account that is used for cash sales.

6) Prepare a schedule of accounts receivable

Each month a schedule of accounts receivable is prepared. It is used to prove the subsidiary ledger against the Accounts Receivable account. It also reports the amounts due from credit customers.

3) Post from the sales journal to the customers' accounts int he accounts receivable subsidiary ledger

The accounts of individual credit customers are kept in a subsidiary ledger called the accounts receivable ledger. Daily postings are made to this ledger from the sales journal, the cash receipts journal, and the general journal or the sales returns and allowances journal. The current balance of a customer's account is computed after each posting so that the amount owed is known at all times.

7) Compute trade discounts

Wholesale businesses often offer goods to trade customers at less than retail prices. Trade discounts are expressed as a percentage off the list price. Multiply the list price by the percentage trade discount offered to compute the dollar amount.

Control Account

An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger

Contra revenue account

An account with a debit balance, which is contrary to the normal balance for a revenue account

List Price

An established retail price

2) Post from the sales journal to the general ledger accounts

At the end of each month, the sales journal is totaled, proved, and ruled. Column totals are then posted to the general ledger. Using a sales journal rather than a general journal to record sales saves the time and effort of posting individual entries to the general ledger during the month.

9) Prepare the state sales tax return

In states and cities that have a sales tax, the retailer must prepare a sales tax return and send the total tax collected to the taxing authority.

Charge-account sales

Sales made through the use of open-account credit or credit cards

4) Record sales returns and allowances in the general journal

Sales returns and allowances are usually debited to a contra revenue account.

5) Post sales returns and allowances

Sales returns and allowances transactions must be posted to the general ledger and to the appropriate accounts receivable subsidiary ledgers. The balance of the Sales Returns and Allowances account is subtracted from the balance of the Sales account to show net sales on the income statement.

Net Sales

The difference between the balance in the sales account and the balance in the sales and returns allowances account

Net Price

The list price less all trade discounts

1) Record credit sales in a sales journal

The sales journal is used to record credit sales transactions, usually on a daily basis. For sales transactions that include sales tax, the sales tax liability is recorded at the time of the sale to ensure that company records reflect the appropriate amount of sales tax liability.

Merchandise Inventory

The stock of goods a merchandising business keeps on hand