BUSA 100 – Intro to Acct.
Chapter 7  – Special Journals - The Sales Journal and Accounts Receivable
Schmidt:

Where we have been:  You have completed the full accounting cycle for a service-oriented firm. 

Where we are going:  We will now change our focus from a service-oriented firm to a merchandising enterprise.  We will discuss some special accounts, journals, and other accounting transactions unique to merchandising operations.

  What is a merchandising Enterprise?

A merchandiser is a company who buys goods and turns around and sells them in the same form.  (That is, they don’t make or manufacture the goods – they only sell them.)  A merchandising entity has three basic parts to its operations:  the selling side and the buying side relate to the sales process. The rest of it deals with other general and administrative functions.  These will all be discussed in detail over the next few chapters. 

Some new accounts to learn 

The Revenue Side of the house

In the past, we have used revenue accounts like Income from Services or Concession Income.  A merchandiser has one main source of income:  Sales.

The Sales account is a revenue account.  It has a credit balance like all normal revenue accounts.  It is used to record the sales of merchandise.

We will also learn about two new contra accounts.  (Remember those are the accounts that have balances contrary to their normal accounts.)  There are two contra revenue accounts in this chapter.

• Sales return and allowances – Used to record the physical return of merchandise from our customers.  This account also handles allowances, which are reductions for defective or damaged goods that the customer does not want to physically return.  These returns and allowances are tracked because even a trend showing slight increases in these activities can affect a merchandiser.  Because this is a contra-revenue, it has a debit balance.  As you will see later, it will eventually wind up the amount of sales on the income statement. (Documents called "credit memos" are usually used to confirm that a seller will reduce the amount of the buyer's debt.)
• Sales discounts – To encourage quicker payments to assist us in our cash flow, we may offer discounts for fast payment.  We may offer credit terms such as 1/10 net 30, which means that we are offering a 1% discount if the invoice amount is remitted within 10 days.  Otherwise, the full amount is due in 30 days.  We will discuss these more in the chapter on cash receipts and payments.

Special Journals

Because many of the merchandisers’ transactions are repetitive (they sell things all day), accountants use special journals, in place of the regular old general journal, that you are familiar with.  The general journal is not out of the picture all together.  It will still be used for any transaction, which the specialized journals cannot handle. 

A summary of special journals is shown below:

Sales Journal Used to record sales of merchandise on account.

Purchase Journal Used to record purchases of merchandise on account.

Cash Receipts Journal Used to record receipts of cash.

Cash Payments Journal Used to record payments of cash.

  These journals will serve as time savers. They will cut down on the posting time required to get the information into the ledgers.  (And nobody likes posting, so this is a good thing.) 

The Sales Journal

The first part of this chapter will focus on the sales journal.  In order for a transaction to be placed in the sales journal, it has to meet two requirements:

• It has to be a sale of merchandise
• It has to be on account

If it meets the criteria, it goes here.  You can see an example of a sales journal on page 203. 

At the end of the month, ONE lump sum or summarizing posting is made to the ledger that debits the Accounts receivable account, and credits the sales account.  This can save the accountant a lot of time.  If we didn’t use this sales journal, then for every sale that was made, we would have to debit AR and credit sales – FOR EACH AND EVERY SALE !!!!!  This sales journal allows us to make one posting at the end of the end of the month, instead of individual ones. 

The Account Receivable Subsidiary Ledger

One more issue – tracking individual customer balances:

The sales journal is great and saves posting time.  However, Accounts Receivable or AR is a very large asset for a merchandiser, and it’s important to have a mechanism to track the individual balances at all times.  To do this, we introduce the concept of a subsidiary ledger.  Remember, the AR balance in the general ledger represents the total amount of money owed to us by our customer.

The subsidiary ledger tracks the individual amount owed by each individual customer.  This AR subsidiary ledger can be compared to a notebook – one page for each customer showing all the activity that has happened to the individual account.  The sum of all the individual balances in this notebook (the subsidiary ledger) should balance to the AR total amount in the general ledger after all postings are up to date. Because we need to keep track of these individual balances, it is important to update the subsidiary ledger every time a sale is made.  This update will be shown by placing a checkmark in the post reference column of the sales journal. 

Also, any time a customer returns something, we need to remember to update that customer’s account.

In other words, from here on out, EVERY TIME WE TOUCH AN AR ACCOUNT WE NEED TO UPDATE THE INDIVIDUAL’S ACCOUNT IN THE AR SUBSIDIARY LEDGER!!! 

The balancing act:  The schedule of Accounts Receivable

You have probably figured out by now that almost everything we do in accounting has a balancing feature to it.  This is not the exception.  At the end of the month, the accountant takes all the ending balances from the individual customer accounts and lists them out by customer.  The accountant then checks to make sure this total balances with the amount in the G/L.  This insures that all posting have been done correctly. 

We will demonstrate how the sales journal works, how the postings are made, and how to reconcile the AR total to the subsidiary ledgers in class.