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.
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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
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
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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
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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
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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.
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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.
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• 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.
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Journalizing a Return from
an On Account Sale
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the
Accounts
Receivable
Subsidiary
Ledger
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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
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Cash Discounts
Cash discount or Sales discount is the amount a
customer can deduct from the amount owed for
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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
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Cash Discount
Payments
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Cash Sales
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Bankcard Sales
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Other Sales
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