CHAPTER 6: ACCOUNTING FOR An invoice is a document prepared by the seller of the

MERCHANDISING BUSINESS merchandise. The seller calls it a sales invoice.

Merchandising companies earn income by buying and A copy is given to the buyer of merchandise and he calls
selling products or merchandise. it a purchase invoice.
Merchandise represents goods or items intended for sale The Sales account is a revenue account that is used for
by a merchandiser in the normal course of business recording sales of merchandise whether the sale is made
operations. for cash or on account.
Accounting for a merchandising business is more ENTRTY (SELLER) ENTRY (BUYER)
complex than a service business.
Dr. Cash Dr. Purchase
The accounting system for a merchandiser must be
Cr. Sales Cr. Cash
designed to record the receipt of goods for resale, keep
tract of the goods available for sale, and record the sale Trade Discounts- which is a percentage reduction from a
and cost of the merchandise sold. published list price.
CONDENSED INCOME STATEMENT OF  granted to certain customers such as dealers or
SERVICE VS MERCHANDISING wholesalers for buying frequently and in large
quantities.
 a trade discount is granted at the point of sale, this
is immediately deducted from the list price and
the difference which is called the invoice price
will be the basis for invoicing and recording.
Merchandisers offer their goods to customers using a
catalog where the goods are listed with their prices. The
prices are called catalog or list prices.
The sales price or invoice price is computed as follows:
List price P 100,000
Multiply by complements of 85% x 90%
Merchandising business income statement has three trade discounts
parts: Invoice Price P 76.500

(1) Revenue from sales, ENTRTY (SELLER) ENTRY (BUYER)

(2) Cost of goods sold
Dr. Accounts Receivables Dr. Purchase
(3) Expenses.
Cr. Sales Cr. Accounts Payable
In a merchandising, the gross margin from sales
must be computed first before expenses are deducted in Sales Returns and Allowances
order to arrive at net income.
A customer may return merchandise if it is defective of
Income statement of a service type shows the income is poor quality, or erroneous merchandise had been
computed by deducting expenses from revenues delivered. This is known as sales return.
Revenue from sales arise from sales of goods or The customer may also be willing to accept the goods
merchandise by the merchandising business. despite of some defects provided a reduction in the
invoice price will be granted to the customer. This is
The cost of goods sold tells how much the merchandiser
known as sales allowance.
paid for the goods or merchandise sold.
Whether the transaction is a sales return or a sales
The difference between revenue from sales and cost of
allowance, the title used to describe both situations is the
goods sold is known as gross margin or gross profit.
account Sales Returns and Allowances, a contra revenue
Operating Expenses are those expenses other than cost account.
of goods sold, that are incurred in running the business.
The seller issues a document, credit memorandum to
Net Income for a merchandising company is what is left evidence sales return. Credit memo informs the customer
after deducting operating expenses from gross margin. that a credit has been made to his/her account for a sales
return or allowance granted.
When operating expenses are greater than the gross
margin, the difference represents net loss. ENTRTY (ON ACCOUNT) ENTRY (CASH)

Sales and Related Accounts Dr. SR&A Dr. SR&A

Gross sales consist of total sales for cash and total sales Cr. Accounts Receivables Cr. Cash
on credit during an accounting period.
TAKE NOTE: that Sales Returns and Allowances Purchases and Related Accounts
account is used in recording returns of customers instead
Under the periodic inventory system, when a
of directly debiting the Sales account.
merchandising business buys goods or merchandise for
 This is important because it will disclose the extent sale, the Purchases account is debited for the cost of the
and the total amount of sales returns. Management goods purchased.
will then be able to investigate the causes especially
Purchases account is used only for merchandise
if the amount of returns is excessive. Proper
purchased for sale.
measures will then be taken and if needed must be
implemented to be able to address the problem. Purchase Returns and Allowances
Sales Discount From the buyer's viewpoint, the returns and allowances
on goods purchased is called Purchase Returns and
When goods are sold on credit, both parties should have
Allowances. This is a contra account whose normal
an understanding as to the amount, mode and date of
balance is credit.
payment. These terms are usually printed on the sales
invoice and constitute part of the sales agreement. The purchaser may issue a document called debit
memorandum to evidence the purchase returns. This
To encourage customers to pay their accounts promptly,
will inform the seller that a debit has been made to the
sellers offer a cash discount.
purchaser's accounts payable for a purchase return or
This discount, is usually given if payments are received allowance.
within a certain number of days from the date of sale.
ENTRTY (ON ACCOUNT) ENTRY (CASH)
From the seller's viewpoint, cash discount is called Sales
Dr. SR&A Dr. SR&A
Discount.
Cr. Accounts Receivables Cr. Cash
Cash Discount Terms are: 2/10, 1/30
2/10, 1/15, n/30 TAKE NOTE: The Purchase Returns and Allowances
2/EOM, n/60 account is used in recording returns of merchandise to the
2/10/EOM, n/60 seller instead of directly crediting the Purchases account.
This will enable the management to determine the
When no offer of cash discount is made by the seller,
extent and the total amount of purchase returns. Proper
the credit terms will just give the maximum time
measures then may be taken to know the causes of
period of payment. n/30, 1/60 or n/10/EOM.
returns.
The Sales Discount account is debited by the seller when
Purchase Discount
a customer avails of the cash discount. It is a contra
revenue account. From the buyer's viewpoint, cash discount is called
Purchase Discount.
Sales Discount and Sales Returns and Allowances
account are both deducted from Sales to arrive at Net Purchase Discount account is credited by the buyer when
Sales in the Income Statement. he avails of the cash discount.
ENTRTY (ON ACCOUNT) Purchase Discount is a contra account similar to
Purchase Returns and Allowances. Both have a normal
Dr. Cash
credit balance and are both deducted from the account
Dr. Sales Discount Purchases in the income statement.

Cr. Accounts Receivables ENTRTY (ON ACCOUNT)

Computation: Dr. Accounts Payable

Accounts Receivable, January 2, sales P 15,000 Cr. Purchase Discount

Less: Returns on January 2,000
Balance P 13,000 Cr. Cash
Less: 2% cash discount (P13,000 x 2%) 260 Transportation Costs on Merchandise Purchased or
Amount due from B Company P 12.740 Sold
Income Statement Presentation - Revenues from Sales Failure to include transportation costs will affect the
The following is a partial income statement presentation cost of goods sold and ultimately affect the net income.
of Revenue from Sales:
FOB shipping point - the term means free on board at
shipping point. The purchaser or buyer agreed to
shoulder all the transportation costs from the point of
shipment up to the point of destination. The buyer
receives title to the goods at shipping point.
FOB Destination - the term means free on board at
destination. The seller agreed to shoulder all the
transportation costs from the point of shipment up to the represents the largest single deduction in a company's
point of destination. The buyer receives title to the goods income statement.
at point of destination.
Freight prepaid - when the seller pays the
transportation costs at the time of shipment.
Freight collect - the buyer pays the transportation
costs upon receipt of the goods at the place of
destination.
FOB Shipping Point, Freight Collect
ENTRTY (SELLER) ENTRY (BUYER)
Accounting for Inventories
(No entry) Dr. Freight In
The primary objectives of internal control over
Cr. Cash inventory are safeguarding the inventory and properly
reporting it in the financial statements.
FOB Shipping Point, Freight Prepaid
The two accounting systems used for inventories are:
ENTRTY (SELLER) ENTRY (BUYER)
1. Perpetual Inventory System
Dr. Accounts Receivables Dr. Freight In 2. Periodic Inventory System
Cr. Cash Cr. Accounts Payable Both systems can be used to record information about
FOB Destination, Freight Prepaid the cost of beginning and ending inventory and the cost of
goods sold.
ENTRTY (SELLER) ENTRY (BUYER)
PERPETUAL INVENTORY SYSTEM
Dr. Freight Out (No entry)
The perpetual inventory system provides detailed
Cr. Cash records of the quantity and cost of each item of inventory
and continuously shows the cost of goods on hand.
FOB Destination, Freight Collect
 This inventory system has traditionally been used by
ENTRTY (SELLER) ENTRY (BUYER)
companies that high-unit value items.
Dr. Freight Out Dr. Purchase  Under the perpetual inventory method, the cost of
each item is debited to the Merchandise Inventory
Cr. Accounts Receivable Cr. Accounts Payable account as it is purchased.
(deduct freight cost)
As items are sold, the Merchandise Inventory account
Computation: is credited and the Cost of Goods Sold is debited for the
Accounts Payable (S, Company) P 100,000 cost of the items sold.
Less: freight paid by B, Company P 10,000
At the end of the accounting period, a physical inventory
Cash discount (2% x P100,000) 2,000
is taken by actually counting the number of units on hand
Total amount to be deducted 12.000
Net amount due to S Company P 88.000 which is then compared with the records showing the
number of units remaining.
Freight In account is used to record freight costs incurred The records for a perpetual inventory system may be
by the buyer in acquiring the merchandise. maintained manually. However, such a system is costly
Also called as Transportation-In which. It has a and time consuming for businesses with a large number
normal debit balance. of inventory items with many purchase and sales
transactions. In most cases, the record keeping for
Freight In is shown in the Cost of Goods Sold section of perpetual inventory system is computerized.
the Income Statement. It is added to Purchases to arrive
at the total cost of goods purchased. PERIODIC INVENTORY SYSTEM

It is an adjunct account. Under the periodic inventory system, the count of the
physical inventory takes place periodically, usually at the
Freight Out account is used to record shipping costs end of the accounting period, and no detailed records of
shouldered by the seller for sales of merchandise to the physical inventory on hand are maintained during the
customers. period:
Another term is Delivery Expense which is shown in the The Purchases account is used to record the cost of
Selling Expense section of the Income Statement. merchandise bought by the business.
Cost of Goods Sold refers to the cost of merchandise sold When merchandise is sold, revenue is recorded but not
to an accounting period. Oftentimes, cost of goods sold the cost of merchandise sold.
When financial statements are prepared, the company
takes a physical count of the ending merchandise
inventory which is then used in computing the cost of
goods sold.
The periodic inventory system is used by merchandising
companies with low value items of inventory.
This is used for its simplicity, but it provides little
control over inventory. Any items not included in the
physical count of inventory at the end of the period are
assumed to have been sold. Thus, even if items have
been stolen, they are assumed to have been sold and
their costs are included in the cost of goods sold.
The new accounts introduced, their classification and normal balance.
Value Added Tax (VAT) CHAPTER 7: COMPLETION OF THE
ACCOUNTING CYCLE FOR MERCHANDISING
Business enterprises subject to business taxes are BUSINESS
required to pay taxes due the Bureau of Internal Revenue
(BIR) according to the National Internal Revenue Code.
The Accounting Cycle
One kind of tax is the value added tax (VAT).
VAT is a form of sales tax. It is a tax on consumption Same accounting cycle used in service business
levied on the sale of goods and services and on the imports but there are two other adjustments will be discussed,
of goods in the Philippines. It is an indirect tax, which these are adjusting entry for Merchandise Inventory and
can be passed on to the buyer. adjustment to take up provision for uncollectible accounts
or bad debts. A more thorough discussion for
In sales transaction, a 12% output tax is levied uncollectible accounts is made in this chapter
on customers and added to the selling price.
Procedure for Determining Merchandise Inventory
In purchase transaction, a 12% input tax is (Periodic Inventory Method)
being paid to suppliers in addition to the purchase price.
1. Make a physical count of merchandise on hand
We call the sum of the selling price and output tax at the end of the accounting period.
as the invoice price; likewise the invoice price is also the 2. Multiply the quantity of each type of
sum of the purchase price and input tax. merchandise by its unit cost.
The output tax account has a credit balance; the 3. Add the resulting costs of each type of
input tax account has a debit balance: the excess of merchandise to obtain a total. This amount is the
output tax over input tax is known as the Value Added ending merchandise inventory.
Tax payable. The cost of ending merchandise inventory is deducted
VAT Payable is a current liability of the from the cost of goods available for sale to determine
enterprise until the same is remitted to the BIR. cost of goods sold.

VAT Payable should be remitted to the BIR The ending inventory of one period is the beginning
within 25 days of the next month. inventory of the next accounting period.

BUY & SELL AJE:

ENTRTY (SELLER) ENTRY (BUYER) Dr. Income Summary

Dr. Cash Dr. Purchase Cr. Merchandise Inventory

Cr. Sales Dr. Input Tax To close the beginning inventory

Cr. Output Tax Cr. Cash

RETURNS AND ALLOWANCES (CASH) Dr. Merchandise Inventory
Cr. Income Summary
ENTRTY (SELLER) ENTRY (BUYER)
Dr. SR&A Dr. Cash To record the ending inventory

Dr. Output Tax Dr. PR&A Accounting for Uncollectible Accounts

Cr. Cash Cr. Input Tax Uncollectible Accounts expense, doubtful

accounts expense, or bad debts expense is an operating
CASH DISCOUNT expense incurred because of failure to collect receivables.
ENTRTY (SELLER) ENTRY (BUYER) There are two generally accepted methods of
accounting for receivable thought to be uncollectible:
Dr. Cash Dr. Accounts Payable
(1) the direct write-off method, and
Dr. Sales Discount Cr. Cash
(2) the allowance or reserve method.
Dr. Output Tax Cr. Purchase Discount
Both conform to acceptable accounting practice,
Cr. Accounts Receivables Cr. Input Tax when used in appropriate circumstances. However, for
income tax purposes, only the direct write-off method
COMPUTATION is permissible.
Accounts Receivable balance P 50,400 Whichever method the company adopts should be
Less: Cash discount P 900 used consistently from year to year unless,
VAT on discount (12% x 900) 108 1,008
circumstances indicate the desirability of a change of
Amount collectible by S Company P 49.392
method.
The Direct Write-Off Method The Allowance for Doubtful Accounts is a
contra asset account that is deducted from the balance
The direct write-off method is used by small
of the accounts receivable at the end of the period.
businesses who sell most of its merchandise or services
on cash basis. This reduction cannot be allocated among the
individual accounts in the subsidiary ledger and,
The amount of its receivable is small in relation
therefore, should not be credited to the controlling
to its total current assets, the credit period is short, and the
account in the general ledger.
credit and collection procedures are adequate. Hence, the
loss from uncollectible account is minor in relation to When the allowance account includes provision
its revenue. for doubtful accounts and notes, the allowance is
deducted from the total of Notes Receivable Accounts
AJE: Receivable.
Dr. Uncollectible Account Expense
Writing-off Uncollectible Account Under the
Cr. Accounts Receivable Allowance Method

Sometimes, accounts that have been written-off AJE:

are collected later. If the recovery is in the same fiscal
Dr. Allowance for Doubtful Accounts
year as the write-off, the earlier entry is reversed to
reinstate the account. The receipt of cash and the credit Cr. Accounts Receivable
to the receivable account are then recorded in the usual
Note that under the allowance method, the debit
manner.
is to a contra asset account rather than to the expense
AJE: account.
Dr. Accounts Receivable The reason is that, bad debts expense is already
recorded by the adjusting entry when the allowance
Cr. Uncollectible Account Expense
was established.
The expense was, thus, recorded in the period
Dr. Cash
when the sale was made, not necessarily in the period
Cr. Accounts Receivable when the account becomes uncollectible, as with the
direct write-off method.
Can be combined in a single entry however, it is
preferable to record recovery in the customer's account When an account that has been charged to the
so that information will be available for credit purposes allowance account is subsequently collected, the
in the future. account should be reinstated by an entry that is just the
reverse of the write-off entry
When an account that has been written-off in
prior year is collected in subsequent year, it may be AJE:
reinstated by an entry crediting some other appropriately
Dr. Accounts Receivable
titled account, such as "Recovery of Uncollectible
Account Written-off.” Cr. Allowance for Doubtful Accounts
The credit balance in such an account at the end
of the year is reported on the income statement as a Dr. Cash
deduction from Uncollectible Accounts Expense. Such
Cr. Accounts Receivable
amounts are likely to be relatively minor and have little
effect on net income. Estimating Uncollectible Accounts Based on Trade
Receivables
The Allowance or Reserve Method
The estimate uncollectible accounts at the end
The allowance method of recording bad debts
of an accounting period is based on experience and
adheres to these principles by making provision for bad
forecasts of the future.
debts expense in advance of the time when the debts are
identified as being uncollectible. The estimated bad debts may be based on the
Accounts Receivable balance where in:
The allowance for doubtful accounts also
reduces the accounts receivable to its net realizable a. Single rate is applied to outstanding
value. accounts receivable or
b. Analysis of Accounts Receivable is made
AJE:
where accounts are classified according to
Dr. Doubtful Accounts Expense how long they remain outstanding. This is
called Aging of Accounts Receivable.
Cr. Allowance for Doubtful Accounts
Percent of Accounts Receivable Method (Administrative Expenses)
(Other Expenses)
Under this method, a single rate is multiplied by Finance Costs (Interest Expense)
the total outstanding accounts receivable and the Net Income (Loss)
product represents the estimated uncollectible
accounts. b) Nature of Expense method
Aging of Accounts Receivable Method Net Sales
Other Income
The aging of accounts receivable is the process
Total Revenue
of listing each accounts receivable according to the due (Changes in merchandise inventories)
date of the account. (Net Purchases)
An aging schedule is prepared by classifying (Operating Expenses)
(Finance Costs)
each receivable by its due date.
Net Income
The number of days an account is past due is
determined from the due date of the account to the date Sales is the principal source of income of a merchandising
the aging schedule is prepared. business.

The aging schedule is completed by adding the Net Sales is computed by deducting the contra-revenue
columns to determine the total amount of receivables accounts, the Sales Returns and Allowances and Sales
in each age class. Each age class is multiplied by the Discounts, from Gross Sales.
percentage uncollectible assigned to each age class and Gross Profit is the difference between the net sales and
then the sum are added to get the total estimated cost of goods sold.
uncollectible account.
The net sales must be large enough to recover not only
The aging method provides the most the cost of goods sold but also the operating expenses of
satisfactory approach to the valuation of the receivables the business.
at their net realizable amounts. Furthermore, the data
developed through aging of receivables will be useful to Other Income or non-operating revenue or
management for purposes or analysis and control. other revenue are revenue related to the sale of products
or merchandise or services regularly offered a by a
Work Sheet for a Merchandising Business business.
All the steps in the preparation of a work sheet in Examples: interest income, rent income, dividend
a service business taken up in Chapter 5, are basically the income, commission income, the unusual or non-
same steps in a merchandising concern. Both the debit and recurring gains or losses like gains or losses from dig an
credit amounts for the account Income Summary are old equipment.
extended to the Adjusted Trial Balance columns or if an
eight-column work sheet is prepared, extension will be Operating expenses of a merchandising business
directly are those expenses other than cost of goods sold incurred
in the normal course of business. They are the ordinary
The Purchases, Purchase Returns and and necessary expenses incurred in the day-to-day
Allowances, Purchase Discounts, and Freight-in operations of the business.
accounts are extended to the Income Statement columns
of the work sheet since they will also become part of the Three categories of Operating Expense:
computation of the cost of goods sold.
A. Distribution Costs sometimes called Selling
After all adjusted balances of the items have been Expenses
extended, then the net income or loss can now be B. General and Administrative Expenses and
determined in the same manner as in a service business. C. Other Operating Expenses.

The Income Statement Distribution Cost or Selling Expenses are

expenses directly related to the selling activity of the
The income statement for a merchandising business.
business reports sale, cost of merchandise sold, and
gross profit. Examples are Sales Salaries, Salesmen's Commission,
Delivery Expense, Advertising, Store Supplies Expense,
Two formats of Income Statement are given Depreciation of Store Equipment And Other Store
below: Property.
a) Function of Expense or the Multiple-Step General and Administrative Expenses are
Income Statement expenses incurred in the general operations of the
Net Sales business.
(Cost of Sales)
Examples Are Office Salaries, Office Supplies Expense,
Gross Profit
Bad Debts Expense or Uncollectible Accounts Expense
Other Income
(Distribution Costs ) and Depreciation of Office Property and Equipment.
Some expenses like rent expense, taxes expense and The Reversing Entries
insurance expense classified as general and
Some adjusting entries related to the previous
administrative, may sometimes be allocated between
period are reversed at the beginning of the new
selling and administrative categories determined by
accounting period. These entries, called reversing
management.
entries, are the exact opposite of the adjusting entries
The Statement of Owner's Equity made in the previous period.
The Statement of Owner's Equity is a summary Although optional, many accountants prefer to
of all the changes that occurred to the equity of the owner make reversing entries because they help simplify the
during a specific period of time, such as a month or a year. recording of regular transactions in the next accounting
period and also help to bring back the accounts to their
This statement shows the following information:
normal status.
the beginning balance of owner's equity, any additional
investment made by the owner during the period, the net Not all adjusting entries are reversed. Only the
income or loss for the period, the withdrawals made by following entries are reversed:
the owner during the period and the ending balance of
1. Adjustment for accrued expenses;
owner's equity.
2. Adjustment for accrued revenue;
Another name is Capital Statement. 3. Adjustment for prepaid expense when the
expense method was used; and
The Balance Sheet 4. Adjustment for deferred revenue when the
The balance sheet is a list of the assets, liabilities, revenue method was used.
and owner's equity as of a specific date, usually at the
CHAPTER 8 SPECIAL JOURNALS
close of the last day of a month or a year.
Special Journals
The balance sheet shows the financial position
of a business as of a given date. However, as the transactions of the company
increase, using only the two-column journal is inefficient
Balance sheet is also called Statement of
and impractical. There is a need for a more efficient,
Financial Position.
orderly and effective manner of processing data. To
The two formats of the balance sheet are: remedy this problem, accountants developed special
Account (same line) and Report (below) Form. All the journals.
balance sheet accounts were also discussed in Chapter 1,
Each special journal is designed to be used for
except for merchandise inventory (ending balance)
recording a single kind of transactions that occurs
which is classified as a current asset.
frequently.
Journalizing and Posting Adjusting Entries Special journals are designed to systematize the
After the financial statements are prepared, the recording of major recurring type of transactions.
adjusting entries are journalized and posted. The
The number and format of special journals
adjusting entries are taken from the adjustments
actually used in a company depend primarily in the
columns of the work sheet.
nature of the company's business transactions.
After the adjusting entries are posted to the
The Sales Journal is used to record all sales of
accounts in the ledger, all the ledger account balances
merchandise on account.
will have the same balances as shown in financial
statements. The Cash Receipts Journal is used to record all
inflows or receipts of cash.
Journalizing and Posting Closing Entries
The Purchases Journal is used to record all
Closing entries are entries made at the end of the
purchases of merchandise and other items on account.
accounting period immediately following the adjusting
entries. They are prepared to bring all the balances of The Cash Disbursement Journal is used to
temporary or nominal accounts to zero. record all payments (or outflow of cash).
The Post-Closing Trial Balance The following are the advantages of using
special journals:
After the adjusting and closing entries have been
posted to the ledger, we are now ready to prepare a post- 1. It saves time in journalizing.
closing trial balance. Since all the temporary or nominal 2. It saves time in posting.
accounts are closed or became zero balances, only 3. It eliminates the detail from the general
balance sheet accounts will have balances at the end of ledger.
the accounting period. 4. It provides division of labor
5. It aids in management analysis.
The post-closing trial balance will only consist of
real or permanent accounts (balance sheet accounts). Although the company is using special journals,
the general journal is still needed since there are
transactions that cannot be recorded in any of the special Sales Journal
journals.
The Sales Journal is used only for sales on credit; cash
Examples: sales are recorded in the Cash Receipts Journal.

 Receipt of credit memo from a vendor for purchase The simplest form of Sales Journal has only one
return. column labeled Account Receivables-Debit and Sales-
 Issuance of credit memo to a customer for sales Credit. Because every sale on account is journalized by
return. this same debit and credit.
 The receipt of a promissory from a customer in The customer's name is necessary in order to
settlement of an account.
know the subsidiary ledger account affected by the sales
 Adjusting entries transaction.
 Correcting entries
 Closing entries The invoice number simply provides
documentation that a sale actually occurred.
In the posting reference column, a check mark
is placed to indicate that the amount of the sale has been
posted to the customer's subsidiary ledger account.
Posting the Sales Journal
The individual amounts are posted daily to each
individual customer account in the subsidiary ledger. The
posting is done daily to show the amount currently due
All these five journals are books of original entry. from the customer.

If a transaction is recorded in the journal, it is posted At the end of the month, the total of the money column is
to the ledger and made part of the accounting records. posted in the general ledger as a debit to Accounts
Therefore, if a transaction is recorded on a special Receivable control account and as a credit to Sales
journal, it should not be recorded in the general account.
journal anymore because this will record the transaction In the posting reference column of the general ledger
twice. account, SJ1 (Sales Journal, page 1) is entered, accounts
Control Accounts and Subsidiary Ledgers number 112 for Accounts Receivable and 411 for Sales
are written in the Sales Journal under the total of the
A control account is an account in the general ledger that money column to show that the total has been posted to
shows all the total balance of the subsidiary accounts those accounts.
related to it.
After completing the posting of accounts receivable, the
Example: General ledger Accounts Receivable Accounts Receivable control account is equal to the
Account, which summarizes all the amounts owed to the sum of the balances in the Accounts Receivable
company. subsidiary ledger accounts.
The subsidiary ledger accounts show the details The subsidiary ledger accounts are not numbered,
supporting the related general ledger control account since their composition is normally changing, but are
balance. kept in alphabetical order.
The company may use subsidiary accounts for receivables Some companies do not use a formal sales journal for
to send statement of accounts to customers. They may use sales on account. Instead they enter the amount of each
the subsidiary accounts for pavables to determine the invoice directly in the subsidiary ledger account of the
amount payable to each supplier. customer.
These accounts are normally arranged alphabetically by Cash Receipts Journal
the name of customer or supplier.
The cash receipt journal is used for all transactions
The sum of the subsidiary accounts in the subsidiary involving receipt of cash by the business.
should agree with the balance in the related general
ledger control account the company prepares the The most frequently type of cash transactions are cash
financial statements. sales and collections on account receivable. Many other
types of transaction may result in the receipt of cash by
A subsidiary ledger then is a group of related accounts the business. Therefore, separate credit columns appear
showing the details of the balance of a general ledger for those items.
control account.
COLUMNS: Cash (Dr.), Sales Discount (Dr.), Accounts
The subsidiary ledger is separated from the general Receivable (Cr.), Sales (Cr.), Sundry Accounts (Credit)
ledger in order to relieve the general ledger of a mass of
details and thereby shorten the general ledger trial
balance.
A sundry accounts credit column is provided for The Purchases Journal is designed to accommodate the
miscellaneous accounts which do not occur with enough recording of everything purchased on account.
frequency to warrant special columns.
For each transaction recorded in the purchases journal, the
Posting the Cash Receipts Journal credit is entered in the Accounts Payable Credit
column.
The individual amounts in the Accounts Receivable
Credit column are posted immediately after journalizing The Purchase Debit column is for merchandise bought
to the subsidiary ledger in order to keep the customers' for sale.
balances current.
The Sundry Account Debit column is used to record
The totals of Cash - Debit. Sales Discount- Debit, and purchases on account of items not provided for in the
Accounts Receivable- Credit and Sales- Credit special debit columns.
columns are posted at the end of the month to their
The title of the particular account is entered in the
respective general ledger accounts.
Account Title Column and the amount of the debit is
Their account numbers are also written below the totals recorded in the Amount column.
to indicate that posting is completed.
The number of the account is written in the posting
Since the amounts appearing in the Sundry Account Reference column at the time of posting.
column normally pertain to different accounts, the
COLUMNS: Purchase (Dr.), Cash (Credit), Accounts
column total is not posted.
Payable (Credit), Store Supplies (Dr.), Office Equipment,
Instead a check mark in parentheses is placed below the (Dr.), Sundry Accounts (Dr.)
column total.
Posting the Purchases Journal
Each item under the Sundry Account Credit column is
As each item is posted to the creditor's account, the source
posted individually and the account number is written
of the entry is posted in the posting reference column of
in the Posting Reference column of the Cash Receipts
the account by writing the letter "PJ" and the page
Journal.
number of the Purchases Journal.
Recording Sales Returns and Allowances
At the end of each month, the Purchases Journal is totaled
A sales returns & allowance is a reduction in sales and ruled in the manner illustrated. The equality of the
revenue and a reduction in accounts receivable. It is t debits and credits is determined similar to the following:
preferable to debit an account entitled Sales Returns and 307
Allowances. The transaction will also be credited to
The total of the Accounts Payable- Credit column is
accounts receivable account in the general ledger and to
posted in the General Ledger and the Posting Reference
the customer's account in the accounts receivable
is indicated below the column total.
subsidiary ledger.
The total of Purchases-Debit, Store Supplies- Debit
In each transaction involving sales returns, both the
and Office Supplies- Debit columns are posted
controlling account and the customer account are posted
similarly.
to the General Ledger and to the Subsidiary Ledger.
Hence a diagonal line is placed in the posting reference Each individual accounts in the Sundry Debit section is
column at the time the entry is posted to the General posted to the appropriate account in the General
Journal. Ledger and the account number is posted on the Posting
Reference column at the left of the amount.
When the credit is posted to the customer's account, a
check mark is placed to the right of the diagonal line. The total of this column is not posted; hence, a check
mark is placed below the total to indicate that there is no
The number of the accounts receivable account is
entered at the left after posting to that account in the action required.
ledger. The Cash Disbursement Journal
Schedule of Accounts Receivable All transactions involving payments of cash for various
purposes are recorded in the Cash Disbursements or
A schedule of accounts receivable is prepared to ensure
that the total balances in the subsidiary ledger account Cash Payments Journal.
agrees with the control account. Such transactions include purchases of merchandise and
other items for cash, payment of expenses, payment to
This schedule is merely a listing of open account
creditors on account, cash withdrawal by the owner,
balances.
etc.
The Purchases Journal
All these transactions are credited to Cash; hence it is
The property, frequently purchased on account by a necessary to have a Cash Credit column.
trading concern, includes merchandise for sale to
customers, supplies used in conducting the business,
and plant assets.
Payments to creditors on account are sufficiently frequent Note that the debit to the Accounts Payable account is
to require columns for Accounts Payable Debit and posted in the general ledger and also to the creditor's
Purchase Discounts Credit. account in the subsidiary ledger.
If payment for one or more specific operating expenses The necessity for posting this item to two different
were sufficiently numerous, other special columns are accounts is indicated by placing a diagonal line in the
added to the journal. posting reference column when the transaction is
recorded. The account number (211) and the check
To have an acceptable level of control over cash
mark are written after the respective accounts are posted.
disbursements, most companies pay all bills by check.
Therefore, the Cash Disbursements Journal contains a The Schedule of Accounts Payable
column in which to record the number of the check
A schedule of accounts payable is prepared to make
written for each disbursement.
certain that the total of the balances in the subsidiary
COLUMNS: Cash (Cr.), Accounts Payable (Dr.), ledger accounts agrees with the control account.
Purchase Discount (Dr.), Sundry Accounts (Dr.), Check
No. General Journal
As mentioned earlier in the chapter, the General Journal
Posting the Cash Disbursement Journal
is used for transactions that cannot be recorded in any of
At frequent intervals during the month, the amounts the special journals.
entered in the Account Payable Debit Column are
posted to the creditors account in the Accounts Payable
Subsidiary Ledger.
The source of the entries is indicated by inserting “CDJ”
and the appropriate journal page number in the posting
reference column of the accounts.
A check mark is placed in the posting reference column
of the Cash Payments Journal to indicate that the
amounts have been posted.
The items in the Sundry Accounts Debit column are also
posted to the appropriate accounts in the General
Ledger at frequent intervals.
Posting is indicated by writing the account numbers in
the posting reference column of the Cash Disbursement
Journal.
At the end of the month, the Cash Disbursement Journal
is ruled, and the totals of each money column are taken.
A check mark is placed below the total of the Sundry
Accounts Debit column to indicate that it is not posted.
Each of the totals of the other three columns is posted to
a General Ledger account, and the appropriate posting
reference is written below the column totals.
Recording Purchase Returns and Allowances
In recording Purchase Returns, both the creditor's account
and the controlling account must be debited, and the
account of the commodity originally purchased must be
credited.
Thus, if the return relates to Office Equipment, the
amount of the reduction is credited to Office
Equipment.
If the reduction is in the cost of merchandise purchased
for sale, Purchases is credited. If management wishes to
know both the total amount of merchandise purchased
and the total amount of the merchandise returned, a
separate account entitled Purchase Returns and
Allowances is credited