1Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Operating Cycle of a Merchandising BusinessThe merchandising business operating cycle is a series of transactions. Merchandisers buy goods and sell them to customers for a profit. Most merchandising businesses are either retailers or wholesalers.

Accounting for a Merchandising Business

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2Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Operating Cycle of a Merchandising Business

Accounting for a Merchandising Business

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3Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounts Used by a Merchandising BusinessA merchandising business buys merchandise from a wholesaler or manufacturer and sells the goods to its customers. Merchandise in stock is called inventory.

Accounting for a Merchandising Business

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4Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Merchandise Inventory Account

Inventory is represented in the general ledger by the asset account Merchandise Inventory. The normal balance of this account is a debit.

Merchandise is bought and sold during the operating cycle; the purchase and sale of merchandise is recorded in separate accounts.

Accounting for a Merchandising Business

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5Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Sales Account

The amount of merchandise sold is recorded in the Sales account, a revenue account. The normal balance of the Sales account is a credit.

Accounting for a Merchandising Business

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6Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

International SalesThe United Nations Convention on Contracts for the International Sales of Goods (CISG) provides guidelines governing the international sale of goods. Businesses involved in international sales must consider the challenge of multiple currencies.

Accounting for a Merchandising Business

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7Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Sales on AccountMerchandise can be bought and paid for at a later date. This is called a sale on account and is made to a charge customer.

Analyzing Sales TransactionsSECTION 14.2

8Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Store Credit Card Sales

A credit card is issued to charge customers by a business such as Target. Customers use store credit cards to make their purchase.

A store credit card facilitates sales on account.

Analyzing Sales TransactionsSECTION 14.2

9Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Nonbank Credit Card Sales

A nonbank credit card is similar to a store credit card and is issued by corporations such as American Express.

Analyzing Sales TransactionsSECTION 14.2

10Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Items Related to Sales on Account

A charge sale involves: a sales slip the sales tax the credit terms

Analyzing Sales TransactionsSECTION 14.2

11Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Sales Slip

A sales slip lists the date of the sale, the customer account identification, and the description, quantity, and price of items sold.

There are usually multiple copies with at least one for the customer and one for accounting purposes.

Analyzing Sales TransactionsSECTION 14.2

12Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Sales Tax

Most states and some cities add sales tax to the sale of goods and services. The tax is paid by the customer and collected by the business, which periodically sends the collection to the state. Until then, the amount owed is recorded in a liability account called Sales Tax Payable.

Analyzing Sales TransactionsSECTION 14.2

13Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Credit Terms

The credit terms can be listed on the sales slip. The terms define the time allowed for payment.

Analyzing Sales TransactionsSECTION 14.2

14Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Accounts Receivable Subsidiary LedgerA business with many charge customers will set up a separate ledger, called the accounts receivable subsidiary ledger, with an account for each customer. A subsidiary ledger contains detailed data summarized to a controlling account, the balance of which equals the total of all account balances in the subsidiary ledger.

Analyzing Sales TransactionsSECTION 14.2

15Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Recording Sales on AccountRevenue for a sale is recorded at the time of sale. Revenue must be realizable, or expected to be converted to cash.

Analyzing Sales TransactionsSECTION 14.2

16Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Analyzing Sales TransactionsSECTION 14.2

Recording Sales on Account

17Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Recording Sales on Account

Analyzing Sales TransactionsSECTION 14.2

18Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Recording Sales on Account

Analyzing Sales TransactionsSECTION 14.2

19Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Sales Returns and AllowancesA customer who is unhappy with a purchase and returns it to the merchant performs a sales return. If merchandise is damaged prior to the purchase, a sales allowance, or price reduction, may be issued.

Analyzing Sales TransactionsSECTION 14.2

20Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Credit MemorandumIf the return or allowance occurs on a charge sale, a credit memorandum might be prepared and the customer’s account is credited the amount.

Analyzing Sales TransactionsSECTION 14.2

21Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

The Sales Returns and Allowances AccountSales returns and allowances decrease the total revenue but are not recorded in the Sales account. A separate account, Sales Returns and Allowances, is used. This account is a contra account; its balance decreases the balance of its related account.

Analyzing Sales TransactionsSECTION 14.2

22Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash RefundsSometimes a cash refund is given and the Cash in Bank account is credited instead of Accounts Receivable.

Analyzing Sales TransactionsSECTION 14.2

23Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Posting to the Accounts Receivable Subsidiary LedgerA diagonal line is entered in the Post. Ref. column on the general journal to indicate that the amount is posted in two places: the general ledger controlling account and the subsidiary ledger.

Analyzing Sales TransactionsSECTION 14.2

24Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Posting to the Accounts Receivable Subsidiary Ledger

Analyzing Sales TransactionsSECTION 14.2

25Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Posting to the Accounts Receivable Subsidiary Ledger

Analyzing Sales TransactionsSECTION 14.2

26Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash TransactionsA cash receipt is a transaction in which money is received by a business. The most common sources of cash are payments for cash sales, charge sales, and bankcard sales.

Analyzing Cash Receipt Transactions

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27Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash SalesIn a cash sale, a business gets full payment at the time of the sale. Cash sales are recorded on two tapes, one copy is torn off and given to the customer and the other is kept in the register. The register tape lists the total cash sales and the total sales tax collected.

Analyzing Cash Receipt Transactions

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28Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Charge Customer PaymentsBusinesses record cash received on account from charge customers on prenumbered receipts.

Analyzing Cash Receipt Transactions

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29Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Bankcard SalesBanks can issue both credit and debit cards. These bankcards can be processed manually or electronically. Sales paid by bankcard are recorded in a manner

similar to cash sales. The source document for bankcard sales is the cash register tape.

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30Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Other Cash ReceiptsMerchants can also receive cash from bank loans or the sale of assets. A receipt indicates the source of the cash received.

Analyzing Cash Receipt Transactions

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31Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash DiscountsA cash discount, or sales discount, is sometimes offered to charge customers to encourage prompt payment. Cash discounts are not typically offered to all customers.

Analyzing Cash Receipt Transactions

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32Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Recording Cash ReceiptsThis section shows examples of how to record cash receipts from four sources:

charge customer payments cash discount payments cash sales bankcard sales

Analyzing Cash Receipt Transactions

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33Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Charge Customer Payments

Analyzing Cash Receipt Transactions

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34Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Charge Customer Payments

Analyzing Cash Receipt Transactions

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35Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Discount Payments

Analyzing Cash Receipt Transactions

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36Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Discount Payments

Analyzing Cash Receipt Transactions

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37Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Sales

Analyzing Cash Receipt Transactions

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38Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Bankcard Sales

Analyzing Cash Receipt Transactions

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39Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Other Cash ReceiptsSometimes a business receives cash from a transaction that does not involve the sale of merchandise.

Analyzing Cash Receipt Transactions

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40Glencoe Accounting Unit 4 Chapter 14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

SECTION 14.3

Accounting for Sales and Cash ReceiptsAll of the transactions in the chapter are journalized here.

Analyzing Cash Receipt Transactions