UNIT 4: THE ACCOUNTING CYCLE

ACCOUNTING FOR SALES AND ACCOUNTS RECEIVABLE

Chapter 7 of e-book

Special journals
Journals used for similar and repetitive transactions
• Sales journal – for credit sales
• Sales returns journal – for goods returned by credit customers
• Purchases journal – for credit purchases
• Purchases returns journal – for goods returned to credit suppliers
• Cash receipts journal – for cash receipts
• Cash payments journal – for cash payments
• Petty cash book – for small cash payments

Should the company decide to use special journals, the General Journal will only be used for transactions that cannot be
recorded in the special journals.

Inventory systems
• Periodic inventory system
o An inventory system in which merchandise inventory balance is updated when a physical inventory is
taken, normally at end of the period
o Low cost items
o High volume of transactions
• Perpetual inventory system
o An inventory system that tracks the inventories on hand at all times
o Expensive items
o Low volume of transactions

Definition of Terms [listed in the order of discussion in the PPT]

Account Definition Classification NB
Merchandise Inventory Goods on hand at end of the period Current Asset Dr
Sales Sale of goods Revenue Cr
Sales Returns Return of goods by customers due to damage, low quality, Contra-Sales Dr
or wrong specifications
Sales Allowances Reduction in the original price charged to customers due to Contra-Sales Dr
damage, low quality, or wrong specifications
Sales Discount A cash discount offered to customers for payment Contra-Sales Dr
within the specified discount period
Freight Out Delivery of goods sold assumed by the seller Expense Dr
Purchases Purchase of goods for sale Cost of Sales Dr
Freight In Delivery of goods purchased assumed by the buyer Cost of Sales Dr
Purchase Returns Return of goods due to damage, low quality, Contra-Purchases Cr
or wrong specifications
Purchase Allowances Reduction in the original price charged by supplier due to Contra-Purchases Cr
damage, low quality, or wrong specifications
Purchase Discount A cash discount offered by supplier for payment Contra-Purchases Cr
within the specified discount period

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Advantages of Sales Journal
• Saves time, effort, and recording space
• Makes journalizing and posting more efficient
• Requires only summary postings to the general ledger at the end of each month
• Allows division of work
• Improves the audit trail

Accounts Receivable Subsidiary Ledgers

• Individual ledgers of credit customers
• Total should be equal to the Accounts Receivable Control Account

Accounts Receivable Control Account

• Summary account that is used as a checking device to check the mathematical accuracy of
the Accounts Receivable subsidiary ledgers

Schedule of Accounts Receivable

• A listing of all balances of the Accounts Receivable subsidiary ledgers

Discounts
Trade discounts Cash discounts
Definition Discounts for bulk purchases Discounts for early payment of account
Deducted from List price to determine invoice price Invoice price
Reminder Sales or Purchases is recorded In calculating the amount to be paid or
net of trade discount collected, Returns & Allowances
should be accounted for
Account name Trade discount is not reflected in the books Sales Discount [Dr]
Purchase Discount [Cr]

Advantage of Credit Sales

• The volume of both sales and profits will increase if buyers are given a period of a month or more to pay for the
goods or services they purchase.

Disadvantages of Credit Sales

• Sales on credit will lead to increases in profit only if each customer completes the transaction by paying for the
goods or services purchased.
• If payment is not received, the expected profits become actual losses and the purpose for granting the credit is
defeated.

Credit Control Policies

• Each business must develop well-balanced credit policies:
o Credit policy that is too tight may result in both lower bad debt losses and reduced sales.
o Credit policy that is too lenient may result in both higher bad debt losses and increased sales.
• Collection should be strictly monitored.

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REFERENCE
• Price, J., Haddock, M., & Farina, M., (2021). College Accounting, 16th edition. McGraw-Hill Education.

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