Accounting: The Language of Business (Part 35)

You have to know accounting. It's the language of practical business life. It was a very useful thing to deliver to civilization. I've heard it came to civilization through Venice which of course was once the great commercial power in the Mediterranean. However, double entry bookkeeping was a hell of an invention.Charlie Munger

Accounting for Merchandising Businesses (part H)

by

Charles Lamson

Accounting Systems for Merchandisers

Merchandising companies may use either manual or computerized accounting systems, similar to those used by service businesses. In this post, we describe and illustrate special journals and electronic forms that merchandising businesses may use in these systems.

Manual Accounting System

In a manual accounting system, a merchandise business normally uses four special journals: sales journal (for sales on account), purchases journal (for purchases on account), cash receipts journal, and cash payments journal. These journals can be adapted from the special journals that we Illustrated earlier for a service business.

Exhibit 12 illustrates NetSolutions' sales journal, which is modified from a revenue journal. In a sales journal, each transaction is recorded by entering the sales amount in the Accounts Receivable Dr./Sales Cr. column and entering the cost of the merchandise sold amount in the Cost of Merchandise Sold Dr./Merchandise Inventory Cr. column. The totals of the 2 columns would be posted to the four general ledger accounts. The inventory and accounts receivable subsidiary ledgers would be updated when each transaction is recorded.

Exhibit 13 illustrates our purchases journal for NetSolutions' merchandising business. This journal is similar to the purchases journal for NetSolutions' service business that we illustrated previously. It includes an Accounts Payable Cr. column and a Merchandise Inventory Dr. column, rather than a Supplies Dr. column. At the end of the month, these two column totals would be posted to the general ledger controlling accounts, Accounts Payable and Merchandise Inventory. The amounts in Other Accounts Dr. would be posted individually. The inventory and accounts payable subsidiary ledger would be updated when each transaction is recorded.

Exhibit 14 illustrates a portion of NetSolutions cash receipts journal. In this journal, cash sales are recorded in a Sales Cr. column rather than a Fees Earned Cr. column. In addition, the cost of merchandise sold for cash is recorded in a Cost of Merchandise Sold Dr./Merchandise Inventory Cr. column. Each entry in this column is posted to the inventory subsidiary ledger at the time the transaction is recorded. Sales discounts are recorded in a Sales Discounts Dr. column. At the end of the month, all the column totals except for Other Accounts Cr. are posted to the general ledger. 

Exhibit 15 illustrates a portion of the cash payments journal for NetSolutions. This journal is modified for a merchandising business by adding a Merchandise Inventory Cr. column for recording discounts on purchases paid within the discount period. Each entry in this column is posted to the inventory subsidiary ledger at the time the transaction is recorded. At the end of the month, all the column totals except for Other Accounts Dr. are posted to the general ledger.

EXHIBIT 15 Cash Payments Journal for Merchandising Business

Computerized Accounting Systems

In computerized accounting systems, special journals may be replaced by electronic forms that capture the necessary information. The software then uses the information as the basis for making entries automatically.

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 252-254*

end