ABFA1173 Principles of Accountign 1

Lecture 3: The Sales Cycle

Learning objectives:
Important Textbook Reading: After you have studied this chapter, you should be able to:
 Chapters 14 & 16: Frank Wood & Alan Sangster “Business Accounting 1”  Distinguish the cash and credit sales
Recommended Practice Questions:  Understand the nature of trade discounts and treatment in accounting
 Chapter 14 : Question no. 14.3, 14.4A books
 Chapter 16 : Question no. 16.2A  Explain the difference of debit note and credit note
 Prepare and record transactions in Sales Journal and Return Inwards
Journal
 Posting of the Sales Journal and Return Inwards Journal to the Ledgers

Extract of the “Accounting Cycle” – THE SALES CYCLE

1. Sales

In the course of conducting business, settlement/payment of sales

transactions determines the type of sales: -
The 7 Books
Source Documents of Prime Entry Thebuy
i) Cash sales : When trade customers 3 Ledgers
and pay immediately by
way of cash, cheques, credit cards or transfer of funds.
 Source document - cash bills/cash invoices to trade customers
 Books of prime entry - cashbook (DO NOT record in the Sales
Journal because customers already paid the monies)

Credit Sales Invoice Sales Journalii) Credit sales : When trade customers buy and pay later (credit
period ranging from 1 week, 2 weeks, 30 days, 90 days, or longer)
by way of cash, cheques, credit cards or transfer of funds.
Cash Bill  Source document - sales invoice to trade customers.
Sales Ledger
Returns Inwards Journal
 Books of prime entry - Sales Journal to identify the trade
customers who owe the business monies.
Credit Note
Cash Book General Ledger
Official Receipt 2. Trade Discount (to trade customers)
ABFA1173 Principles of Accountign 2

Trade discounts are percentage (%) reduction given to trade customers 7 Books of Prime Entry It is a listing regarding the returns from
from the list price, mainly because customers buy a large quantity or as customers (based on details in Credit Notes)
a sales gimmick to make the sales more attractive: -

Eg. 1.8 liter Rice Cooker

RM450 Listed price RM450
Less : 20% Discount (RM90)
You pay only RM360

 Source document – Net amount of sales (RM360) in cash

invoice/sales invoices to trade customers
 Books of prime entry - trade discount are recorded in Sales
Journal
3. Returns Inwards
When goods are returned from trade customers because of defects,
spoilage, legal rights or etc.
 Source document - credit note give to trade customer
 Book of prime entry - return inwards are recorded in the Return
Inwards Journal
4. Books of Prime Entry – Credit Sales cycle
5. Closing of the Books of Prime Entry
At the end of every month, the Sales Journal and Return Inwards
Journal are closed and ready for posting as follows:
i) Sales Journal
 The sales are posted, one by one, to the debit side of respective
customers’ account in the Sales Ledger.
 The total is then posted to the credit side of the Sales Account in
General Ledger.
 At the end of the month, the double entry completed when debit
entries are posted (as a summary total) to the Trade Receivable
Control Account in General Ledger.

Sales Journal - Also known as Sales Day Book. It is one of the 7

Books of Prime Entry. It is a listing relating to credit sales (based on
details in Sales Invoices).
Returns Inwards Journal – Also known as Returns Inwards Day
Book/ Sales Returns Journal/ /Sales Returns Day Book. Also one of the
ii) Returns Inwards Journal
 The returns are posted, one by one, to the credit side of the
respective customers’ account in the Sales Ledger.
ABFA1173 Principles of Accountign 3

 The total then posted to the debit side of the Return Inwards
Account in General Ledger.
 At the end of the month, the double entry only completed when
the credit entries are posted (as a summary total) to the Trade
Receivable Control A/c in General Ledger.

iii) Cash Book – Sales collection

 For collection received from trade customer – post one by one,

to the credit side of Sales Ledger
 At the end of every month, the Cash Book is closed in order to
do posting of totals to the Trade Receivable Control Account in
General Ledger.
ABFA1173 Principles of Accountign 4

Credit Sales cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Issue invoice (credit invoice).

Original copy of the invoice given to
customer. 4 All the individual sales post
to each customers account
in debit side of the Sales
Ledger

2 Duplicate copy of the

invoice is ready for
recording in accounting
books
3 Record details on the
Sales Journal
5
At the end of every month,
total of the Sales Journal
post to credit side in
General Ledger (Sales
A/c)

6
At the end of the month, the
double entry completed
when total of the Sales
Journal post to debit side in
General Ledger (Trade
Receivable Control A/c)

Refer to step 4 &5:

At this point the double entry is not completed. We have entered the total credits into Sales Account in General Ledger but the debits
(individual sales) appear only in the Sales Ledger which is not part of the double entry system.
ABFA1173 Principles of Accountign 5

Illustration 1: Credit Sales

Suggested solution:
The following are business transaction for Hup Seng Trading:
All goods sold with a term of 20% trade discount from list price. (a)
Sales Journal
March Date Particular Invoice No. RM RM
3 Sales of goods to Ali Motors at list price RM2,000 with invoice Mar
number 801. 3 Ali Motors 801 2,000
Less: trade discount 20% (400) 1,600
8 Issue invoice number 802 to Rahman Store as sales of goods
RMRM2,400 at list price. 8 Rahman Store 802 2,400
Less: trade discount 20% (480) 1,920
12 Invoice number 803 issued to Chan Agency as sale of goods RM2,320
at list price 12 Chan Agency 803 2,320
Less: trade discount 20% (464) 1,856
18 Supply goods RM4,000 at list price to Ali Motors, invoice number 804
issued. 18 Ali Motors 804 4,000
Less: trade discount 20% (800) 3,200
23 Superam Mini Market purchase goods RM1,360 at list price, invoice
number 805. 23 Superam Mini Market 805 1,360
Less: trade discount 20% (272) 1,088
26 Goods RM1,760 sent with invoice number 806 to Chan Agency.
26 Chan Agency 806 1,760
Less: trade discount 20% (352) 1,408
Required:
(a) Record the above transaction into Sales Journal 31 Sales Account (Cr) 11,072
(b) Post the data from the Sales Journal to General Ledgers and Sales
Ledgers.
ABFA1173 Principles of Accountign 6

(b) Sales Ledger (b) General Ledger

Sales Account
Trade Receivables: Ali Motors Account Mar RM
Mar RM RM 31 Trade receivables 11,072
3 Sales 1,600
18 Sales 3,200
4,800 Step 6 Trade Receivables Control Account
Mar RM RM
Trade Receivables: Rahman Store Account 31 Sales 11,072
Mar RM RM
8 Sales 1,920

Trade Receivables: Chan Agency Account

Mar RM RM
12 Sales 1,856
26 Sales 1,408
3,264

Trade Receivables: Superam Mini Market Account

Mar RM RM
23 Sales 1,088

Trade Receivables list

RM
Ali Motors 4,800
Rahman Store 1,920
Chan Agency 3,264
Superam Mini Market 1,088
11,072

Note : Close the Sales Ledger at the end of the accounting period. The total
in the trade receivables listing (balances of all the personal accounts in the
Sales Ledger) should be the same as the closing balance in the trade
receivables control account.
ABFA1173 Principles of Accountign 7

Returns Inwards cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Issue credit note (CN)

Original copy of the CN
given to customer. 4 All the individual returns
post to each customers
account in the credit side
of the Sales Ledger

2 Duplicate copy of the

CN is ready for
recording in accounting
books
3 Record details on the
Returns Inwards Journal
5
At the end of every month,
total of the Returns Inwards
Journal post to debit side of
the General Ledger
(Return Inwards A/c)

6
The double entry
completed when total of the
Return Inwards Journal
post to credit side in
General Ledger (Trade
Receivable Control A/c)

Refer to step 4 &5:

The double entry is not completed yet. The total debits are posted into Returns Inwards Account in General Ledger, the credits (individual returns)
appear only in the Sales Ledger which is not part of the double entry system
ABFA1173 Principles of Accountign 8

Illustration 2: Return Inwards Trade Receivables: Rajan & Co. Account

RM June RM
Jaya Store provides the following information: 11 Returns Inwards 720
All goods sold with a term of 20% trade discount from list price. 25 Returns Inwards 960
1,680
June
5 Beta Trading returns damaged goods RM1,000 with credit note 630. Trade Receivables: Murni Store Account
11 Credit note 631 sent to Rajan & Co. for returned goods RM900. RM June RM
17 Issued credit note 632 to Murni Store for damaged goods RM800. 17 Returns Inwards 640
25 Rajan & Co. return goods RM1,200 and credit note 633 was issued.

Required:
(a) Record the above transaction into Returns Inwards Journal.
(b) Post the data from the Return Inwards Journal to General Ledger and (b) General Ledger
Sales Ledger Returns Inwards Account
June RM RM
Suggested solution: 30 Trade Receivables 3,120
(a) Returns Inwards Journal
Date Particular Credit RM RM Trade Receivables Control Account Step 6
Note RM June RM
June 30 Returns Inwards 3,120
5 Beta Trading 630 1,000
Less: trade discount 20% (200) 800
11 Rajan & Co. 631 900
Less: trade discount 20% (180) 720
17 Murni Store 632 800
Less: trade discount 20% (160) 640
25 Rajan & Co. 633 1,200
Less: trade discount 20% (240) 960
31 Returns Inwards Account (Dr) 3,120

(b) Sales Ledger

Trade Receivables: Beta Trading Account
RM June RM
5 Returns Inwards 800
ABFA1173 Principles of Accountign 9

Sales Collection cycle

Illustration 3: Sales Collection
Suggested solution:
DateTransactionsJune 19Received a cheque from Elaine as full
settlement of an outstanding invoice of RM8,000 andThededucting
7 Bookscash
Source Documents of PrimeofEntry Journal entries (Sales Ledger)The 3 Ledgers Dr (RM) Cr (RM)
discount 5% June 19 Dr Bank 7,600
20Received cash RM4,500 from Chong being part payment from his Dr Discount Allowed 400
outstanding account Cr Trade Receivables: Elaine 8,000
21Informed by the bank that Elaine’s cheque was dishonoured due to Payment received from Elaine
insufficient funds in her bank account
28Customer Besty who owes RM3,000 pays her account by cheque, 20 Dr Cash 4,500
deducting RM150 cash discount Cr Trade Receivables: Chong 4,500

1 Issue sales invoices to

the credit customers
Required:
Record the above transaction into Cash Book.
Payment received from Chong

21 Dr
7
For collection received
from customers – post
Trade Receivables: Elaine
one by one, to credit
8,000
Cr Bank side of Sales Ledger 7,600
Post the data from Cash Book to General Ledger and Sales Ledger Cr Discount Allowed 400

2 Receive the payment

in cash or cheque and
issue official receipt
as acknowledgement
5 Record on the debit
side of the Cash Book
Dishonoured cheque from Elaine

28 Dr Bank 2,850
Dr Discount Allowed 150

3 Deposit the cheque

into bank account
Cr
8 The double entry
Trade Receivables:Besty
Payment received fromcompleted
Besty when total of the
Cash Book post to General
Ledger (Dr Discount
3,000

Allowed A/c & Cr Trade

Receivable Control A/c)

4 If cheque is
dishonoured, must
chase customers again
for collection
6 Record on the credit
side of the Cash Book
ABFA1173 Principles of Accountign 10
ABFA1173 Principles of Accounting 11

(a) Cash Book

Discount Discount
Date Particulars Fol. Allowed Cash Bank Date Particulars Fol. Received Cash Bank
RM RM RM
T.R:
June 19 T.R: Elaine 400 7,600 June 21 7,600
Elaine
20 T.R:Chong 4,500
21 T.R:Elaine (400)
29 T.R:Besty 150 2,850
150 4,500 10,450 7,600

Step 8: Total of the Cash Book post to General Ledger to complete the double entry

(b) General Ledger

Discount Allowed Account Trade Receivables Control Account

June RM RM June RM June RM
30 Trade Receivables 150 30 Bank 7,600 30 Cash 4,500
30 Bank 10,450
30 Disc. Allowed 150

(b) Sales Ledger

Trade Receivables: Elaine Account

June RM June RM Trade Receivables: Besty Account
21 Bank 7,600 19 Bank 7,600 RM June RM
21 Disc. Allowed 400 19 Disc. Allowed 400 29 Bank 2,850
Disc Allowed 150

Trade Receivables: Chong Account

RM June RM
20 Cash 4,500
ABFA1173 Principles of Accounting 12

The Purchases Cycle Learning objectives:

After you have studied this chapter, you should be able to:
Important Textbook Reading:  Understand cash and credit purchases and its nature
 Chapters 15 & 16 : Frank Wood & Alan Sangster “Business Accounting 1”  Prepare and record transactions in Purchases Journal and Return
Recommended Practice Questions: Outwards Journal
 Chapter 15 : Question no. 15.3, 15.4  Posting of the Purchases Journal and Return Outwards Journal to the
 Chapter 16 : Question no. 16.1 Ledgers
 Posting of the Purchases’ payment to the General Ledger

Extract of the “Accounting Cycle” – THE PURCHASES CYCLE

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

Purchases Invoice
Purchases Journal
Purchases Ledger
Cash Bill
Returns Outwards Journal
Credit Note General Ledger

Cash Book
Payment Voucher
ABFA1173 Principles of Accounting
3. Purchases
Payment to trade supplier determine the type of purchases: -
i) Cash Purchases :
Business buys trading goods and pay immediately by way of cash,
cheques, credit cards, transfer of funds to trade suppliers’ account.
 Source document - cash bills/cash invoices from trade suppliers
 Books of prime entry - cashbook
ii) Credit Purchases :
Business buys trading goods and pay later with credit terms (credit
days usually ranging from 1 week, 1 month, 3 months, etc)
 Source document - purchases invoice from trade suppliers
 Books of prime entry - Purchases Journal to keep track the
amount owing to the trade suppliers.
4. Trade Discount (from trade suppliers)
Trade discounts are percentage reduction received from trade suppliers.
 Source document - Net amount of purchase shown in cash
invoice/sales invoices from trade suppliers
 Books of prime entry - trade discount are recorded in Purchases
Journal
3. Returns Outwards
When trading goods are returned to trade suppliers due to defects,
spoilage, legal rights or etc,
 Source document - credit note received from a trade supplier
 Book of prime entry - return outwards are recorded in the Return
Outwards Journal
4. Books of Prime Entry – Credit Purchases cycle
 Purchases Journal – Also known as Purchases Day Book. It is a
listing relating to credit purchases (based on Purchases Invoices).
13
 Returns Outwards Journal – Also known as Returns Outwards
Day Book/ Purchases Returns Journal/ /Purchases Returns Journal.
It is a listing regards to returns which is based on credit notes from
trade suppliers
5. Closing of the Books of Prime Entry
At the end of every month, the Purchases Journal and Return
Outwards Journal are closed and ready for posting as follows:
ii) Purchases Journal
 The purchases are posted, one by one, to the credit side of
respective suppliers’ account in the Purchases Ledger.
 The total is then posted to the debit side of the Purchases
Account in General Ledger.
 The double entry completed when credits entries are posted (as
a summary total) to the Trade Payable Control Account in
General Ledger.
ii) Returns Outwards Journal
 The returns are posted, one by one, to the debit side of the
respective suppliers’ account in the Purchases Ledger.
 The total then posted to the credit side of the Return Outwards
Account in General Ledger.
 The double entry only completed when the debit entries are
posted (as a summary total) to the Trade Payable Control A/c in
General Ledger.
iii) Cash Book – Payment for purchases
 For payment to trade suppliers – post one by one, to debit side
of Purchases Ledger
 At the end of every month, the Cash Book is closed in order to
do posting of totals to the Trade Payable Control Account in
General Ledger.
ABFA1173 Principles of Accounting 14
ABFA1173 Principles of Accounting 15

Credit Purchases cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

3 All the individual purchases

post to each supplier
account in credit side of the
Purchases Ledger

1 Receive purchases invoice

for credit purchases
2 Record details on the
Purchases Journal
4
At the end of every month,
total of the Purchases
Journal post to debit side in
General Ledger

5
The double entry
completed when total of the
Purchases Journal post to
credit side in General
Ledger

Refer to step 3&4:

At this point the double entry is not completed. We have entered the total debits into Purchases Account in General Ledger but the credits
(individual purchases) appear only in the Purchases Ledger which is not part of the double entry system.
ABFA1173 Principles of Accounting 16

Illustration 1: Credit Purchases

The following are business transaction for Hup Seng Trading: Suggested solution:

March (a)
2 Received invoice number 330 from Funny Store as purchase of goods Purchases Journal
at list price RM3,200, less trade discount 25%. Date Particular Invoice RM RM
Number
7 Goods supplied by Green Trading at list price RM2,800, less trade Mar
discount 20%, invoice number 218 received. 2 Funny Store 330 3,200
Less: trade discount 25% (800) 2,400
14 Invoice number 245 received from Henry Enterprise for goods at list
price RM4,000, trade discount 25% to be deducted. 7 Green Trading 218 2,800
Less: trade discount 20% (560) 2,240
20 Received goods at list price RM2,400, less trade discount 20% from
Funny Store with invoice number 351. 14 Henry Enterprise 245 4,000
Less: trade discount 25% (1,000) 3,000
28 Henry Enterprise delivered goods RM3,360 at list price with invoice
number 258, less trade discount 25% 20 Funny Store 351 2,400
Less: trade discount 20% (480) 1,920
Required: 28 Henry Enterprise 258 3,360
(c) Record the above transaction in Purchases Journal. Less: trade discount 25% (840) 2,520
(d) Post the data from the Purchases Journal to General Ledgers and 31 Purchases Account (Dr) 12,080
Purchases Ledgers.
ABFA1173 Principles of Accounting 17

(b) Purchases Ledger

Trade Payables: Funny Store Account (b) General Ledger

RM Mar RM
2 Purchases 2,400 Purchases Account
20 Purchases 1,920 Mar RM RM
4,320 31 Trade Payables 12,080

Trade Payables: Green Trading Account Trade Payables Control Account Step 5
RM Mar RM RM Mar RM
7 Purchases 2,240 30 Purchases 12,080

Trade Payables: Henry Enterprise Account

RM Mar RM
14 Purchases 3,000
28 Purchases 2,520
5,520

Trade Payables list

RM
Funny Store 4,320
Green Trading 2,240
Henry Enterprise 5,520
12,080

Note : Close the Purchases Ledger at the end of the accounting period, the
total in the trade payable listing (balances of all the personal accounts in
the Purchases Ledger) should be the same as the closing balance in the
trade payable control account.
ABFA1173 Principles of Accounting 18

Returns Outwards cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

3 All the individual returns

post to each suppliers
account in the debit side
of the Purchases Ledger

1 Receive Credit Note from

suppliers.
2 Record details on the
Returns Outwards Journal
4
At the end of every month,
total of the Returns Outwards
Journal post to credit side of
the General Ledger
(Returns Outwards A/c)

5
The double entry
completed when total of the
Return Outwards Journal
post to debit side in
General Ledger (Trade
Payable Control A/c)

Refer to step 3 &4:

The double entry is not completed yet. The total credits are posted into Returns Outwards Account in General Ledger, the credits (individual returns)
appear only in the Purchases Ledger which is not part of the double entry system
ABFA1173 Principles of Accounting 19

Illustration 2: Return Outwards

Lena Trading provides the following information: Trade Payables: Zee & Co. Account
(All goods purchased with a term of 20% trade discount from list price) June RM RM
June 4 Returns outwards 400
4 Returns damaged goods RM500 to Zee& Co., received credit note 301. 23 Returns outwards 224
9 Received credit note no.208 RM800 from HS Store for goods returned. 624
16 Damaged goods RM1,100 returned to Raya Agency, credit note 504.
23 Zee & Co. Sent credit note 318 RM280 for the wrong types of goods Trade Payables: HS Store Account
returned. June RM RM
Required: 9 Returns outwards 640
(a) Record the above transaction in the Return Outwards Journal
(b) Post the data from Return Outwards Journal to General Ledger and
Purchase Ledger

Suggested solution:
(a) Returns Outwards Journal
Date Particular Credit RM RM
Note
June
4 Zee & Co. 301 500
Less: trade discount 20% (100) 400
9 HS Store 208 800
Less: trade discount 20% (160) 640
16 Raya Agency 504 1,100
Less: trade discount 20% (220) 880
23 Zee & Co. 318 280
Less: trade discount 20% (56) 224
30 Returns Outwards Account (Cr) 2,144 (b) General Ledger
Returns Outwards Account
(b) Purchases Ledger June RM
30 Trade payables 2,144
Trade Payables: Raya Agency Account
June RM RM Step 5 Trade Payables Control Account
16 Returns outwards 880 June RM
30 Returns outwards 2,144
ABFA1173 Principles of Accounting 20

Purchases’ Payment cycle

Illustration 3: Purchases’ Payment Jour
The 7 Books
Source Documents of Prime Entry The 3toLedgers
DateTransactionsJune 4Pay cash RM1,200 Green Trading as part Trading11D
payment for the outstanding sum to F
11A cheque RM75 issued to Funny Store being late payment fees Discoun
charged in previous month Payables : G
18Paid a cheque to Jack as full settlement of an outstanding invoice

1
Receive invoices from of RM6,000 and deducting cash discount of 6%
the suppliers for credit
27Settled of account by cheque RM1,040 to Green Trading
purchases

Required:

2 Prepare the payment

vouchers
Record the above transaction into Cash Book

Post the data from the Cash Book to General Ledger and Purchase
Ledger

3 The boss signs

approval on the
payment vouchers 7 For payments to
suppliers – post one by
one, to debit side of
Purchases Ledger

4 6
Pay cash or write cheques
to suppliers (suppliers sign Record on the credit
on payment vouchers and side of the Cash Book
issues official receipts)

5 Keep as evidence, the

payment vouchers and
cheque counterfoil (if
payment is made by cheque)
8 The double entry
completed when total of the
Cash Book post to General
Ledger (Dr Trade Payable
and official receipt from Control A/c & Cr Discount
suppliers Received A/c)
ABFA1173 Principles of Accounting 21
ABFA1173 Principles of Accounting 22

(a) CASH BOOK

Discount Discount
Date Particulars Fol. Allowed Cash Bank Date Particulars Fol. Received Cash Bank
RM RM RM
T. Payables:
June 4 1,200
Green Trading
T. Payables: 75
11
Funny Store
T. Payables: 360 5,640
18
Jack
T. Payables: 1,040
27
Green Trading

360 1,200 6,755

Step 8: Total of the Cash Book post to General Ledger to complete the double entry

(b) General Ledger

Trade Payables Control Account
Discount Received Account June RM RM
RM June RM 30 Cash 1,200
30 Trade Payables 360 Bank 6,755
Discount Received 360

(b) Purchases Ledger

Trade Payables : Green Trading Account

June RM RM
4 Cash 1,200 Trade Payables: Funny Store Account
27 Bank 1,040 June RM RM
11 Bank 75

Trade Payables: Jack Account

June RM RM
18 Bank 5,640
18 Disc. Rec’d 360