Accounting: The Language of Business (Part 30)

Almost all decisions based on cost accounting are utterly wrong.

Eliyahu Goldratt

Accounting for Merchandising Businesses

(Part D)

by

Charles Lamson

Sales Transactions

In the next several posts, we illustrate transactions that affect the financial statements of a merchandising business. These transactions affect the reporting of net sales, cost of merchandise sold, gross profits, and merchandise inventory.

Merchandising transactions are recorded in the accounts, using the rules of debit and credit that we described and illustrated in earlier posts. Special journals may be used, or transactions may be entered, recorded, and posted to the accounts electronically. Although journal entries may not be manually prepared, we will use a two-column general journal format in the next several posts in order to simplify the discussion. 

Cash Sales

A business may sell merchandise for cash. Cash sales are normally rung up (entered) on a cash register and recorded in the accounts. To illustrate, assume that on January 3, NetSolutions sells merchandise for $1,800. These cash sales can be recorded as follows:

Under the perpetual inventory system (a program that continuously estimates your inventory based on your electronic records), the cost of merchandise sold and the reduction in merchandise inventory should also be recorded. In this way, the merchandise inventory account will indicate the amount of merchandise on hand (not sold). To illustrate, assume that the cost of merchandise sold on January 3 was $1,200. The entry to record the cost of merchandise sold and the reduction in the merchandise inventory is as follows:

How do retailers record sales made with the use of credit cards? Sales made to customers using credit cards issued by banks, such as MasterCard or VISA, are recorded as cash sales. The seller deposits the credit card receipts for these sales directly into its bank account.

Normally, banks charge service fees for handling credit card sales. The seller debits the service fees to an expense account. An entry at the end of a month to record the payment of service charges on bank credit card sales is shown below.

Sales on Account

A business may sell merchandise on account. The seller records such sales as a debit to accounts receivable and a credit to sales. An example of an entry for a NetSolutions' sale on account of $510 follows. The cost of merchandise sold was $280.

Sales may also be made to customers using nonbank credit cards. An example of a nonbank credit card is the American Express card. Nonbank credit card sales may first be reported to the card company before cash is received. Therefore, such sales create a receivable with the card company. Before the card company pays cash, it normally deducts a service fee. For example, assume that American Express card sales of $1,000 are made by NetSolutions and reported to the card company on January 20. The cost of the merchandise sold was $550. On January 27, the card company deducts a service fee of $50 and sends $950 to NetSolutions. These transactions are recorded by NetSolutions as follows: 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 238-239*

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