Question: Journalize the following transactions that occurred in January 2018 for Mike’s Amusements. Assume Mike’s uses the gross method to record sales revenue. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name. Show
Jan. 4 Purchased merchandise inventory on account from Vanderbilt Company, $5,000. Terms 1/10, n/EOM, FOB shipping point. 6 Paid freight bill of $150 on January 4 purchase. 8 Returned half the inventory purchased on January 4 from Vanderbilt Company. 10 Sold merchandise inventory for cash, $1,100. Cost of goods, $440. FOB destination. 11 Sold merchandise inventory to Gilmore Corporation, $10,100, on account, terms of 3/10, n/EOM. Cost of goods, $5,555. FOB shipping point. 12 Paid freight bill of $30 on January 10 sale. 13 Sold merchandise inventory to Cadet Company, $8,800, on account, terms of 3/10, n/45. Cost of goods, $4,400. FOB shipping point. 14 Paid the amount owed on account from January 4, less return and discount. 18 Purchased inventory of $4,600 on account from Roberts Corporation. Payment terms were 1/10, n/30, FOB destination. 20 Received cash from Gilmore Corporation, less discount. 26 Paid amount owed on account from January 18, less discount. 28 Received cash from Cadet Company. 29 Purchased inventory from Silk Corporation for cash, $12,000, FOB shipping point. Freight in paid to shipping company, $240. Companies may use either the perpetual system or the periodic system to account for inventory. Under the periodic system, merchandise purchases are recorded in the purchases account, and the inventory account balance is updated only at the end of each accounting period. Perpetual inventory systems have traditionally been associated with companies that sell small numbers of high‐priced items, but the development of modern scanning and computer technology has enabled almost any type of merchandiser to consider using this system. Under the perpetual system, purchases, purchase returns and allowances, purchase discounts, sales, and sales returns are immediately recognized in the inventory account, so the inventory account balance should always remain accurate, assuming there is no theft, spoilage, or other losses. Consider several entries under both systems. The reference columns are removed from the illustration to simplify what you're seeing. (Note: Ap stands for accounts payable, and AR stands for accounts receivable.)
As the two sets of circled entries indicate, two things happen when there is a sale or a sales return. First, the sales transaction's effect on revenue must be recognized by making an entry to increase accounts receivable and the sales account. Second, the flow of merchandise between inventory (an asset) and cost of goods sold (an expense) is recorded in accordance with the matching principle. A sales return has the opposite effect on the same accounts. Under the periodic system, the inventory and cost of goods sold accounts are updated only periodically, but under the perpetual system, entries that recognize a transaction's effect on these accounts occur when the revenue from the sale is recognized. For convenience, a sale or sales return can be recorded under the perpetual system with a compound entry that lists all four accounts.
 The general journal provides a simple, consistent format to present new information. However, most companies would record the sale in a sales journal. The following example transactions and subsequent journal entries for merchandise sales are recognized using a perpetual inventory system. The periodic inventory system recognition of these example transactions and corresponding journal entries are shown in Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System. Basic Analysis of Sales Transaction Journal EntriesLet’s continue to follow California Business Solutions (CBS) and their sales of electronic hardware packages to business customers. As previously stated, each package contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 printer. CBS sells each hardware package for $1,200. They offer their customers the option of purchasing extra individual hardware items for every electronic hardware package purchase. Figure 6.11 lists the products CBS sells to customers; the prices are per-package, and per unit.
Figure 6.11 CBS’s Product Line. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license) Cash and Credit Sales Transaction Journal EntriesOn July 1, CBS sells 10 electronic hardware packages to a customer at a sales price of $1,200 each. The customer pays immediately with cash. The following entries occur. In the first entry, Cash increases (debit) and Sales increases (credit) for the selling price of the packages, $12,000 ($1,200 × 10). In the second entry, the cost of the sale is recognized. COGS increases (debit) and Merchandise Inventory-Packages decreases (credit) for the cost of the packages, $6,200 ($620 × 10). On July 7, CBS sells 20 desktop computers to a customer on credit. The credit terms are n/15 with an invoice date of July 7. The following entries occur. Since the computers were purchased on credit by the customer, Accounts Receivable increases (debit) and Sales increases (credit) for the selling price of the computers, $15,000 ($750 × 20). In the second entry, Merchandise Inventory-Desktop Computers decreases (credit), and COGS increases (debit) for the cost of the computers, $8,000 ($400 × 20). On July 17, the customer makes full payment on the amount due from the July 7 sale. The following entry occurs. Accounts Receivable decreases (credit) and Cash increases (debit) for the full amount owed. The credit terms were n/15, which is net due in 15 days. No discount was offered with this transaction; thus the full payment of $15,000 occurs. Sales Discount Transaction Journal EntriesOn August 1, a customer purchases 56 tablet computers on credit. The payment terms are 2/10, n/30, and the invoice is dated August 1. The following entries occur. In the first entry, both Accounts Receivable (debit) and Sales (credit) increase by $16,800 ($300 × 56). These credit terms are a little different than the earlier example. These credit terms include a discount opportunity (2/10), meaning the customer has 10 days from the invoice date to pay on their account to receive a 2% discount on their purchase. In the second entry, COGS increases (debit) and Merchandise Inventory–Tablet Computers decreases (credit) in the amount of $3,360 (56 × $60). On August 10, the customer pays their account in full. The following entry occurs. Since the customer paid on August 10, they made the 10-day window and received a discount of 2%. Cash increases (debit) for the amount paid to CBS, less the discount. Sales Discounts increases (debit) for the amount of the discount ($16,800 × 2%), and Accounts Receivable decreases (credit) for the original amount owed, before discount. Sales Discounts will reduce Sales at the end of the period to produce net sales. Let’s take the same example sale with the same credit terms, but now assume the customer paid their account on August 25. The following entry occurs. Cash increases (debit) and Accounts Receivable decreases (credit) by $16,800. The customer paid on their account outside of the discount window but within the total allotted timeframe for payment. The customer does not receive a discount in this case but does pay in full and on time.
Your TurnRecording a Retailer’s Sales TransactionsRecord the journal entries for the following sales transactions by a retailer.
Solution
Sales Returns and Allowances Transaction Journal EntriesOn September 1, CBS sold 250 landline telephones to a customer who paid with cash. On September 3, the customer discovers that 40 of the phones are the wrong color and returns the phones to CBS in exchange for a full refund. CBS determines that the returned merchandise can be resold and returns the merchandise to inventory at its original cost. The following entries occur for the sale and subsequent return. In the first entry on September 1, Cash increases (debit) and Sales increases (credit) by $37,500 (250 × $150), the sales price of the phones. In the second entry, COGS increases (debit), and Merchandise Inventory-Phones decreases (credit) by $15,000 (250 × $60), the cost of the sale. Since the customer already paid in full for their purchase, a full cash refund is issued on September 3. This increases Sales Returns and Allowances (debit) and decreases Cash (credit) by $6,000 (40 × $150). The second entry on September 3 returns the phones back to inventory for CBS because they have determined the merchandise is in sellable condition at its original cost. Merchandise Inventory–Phones increases (debit) and COGS decreases (credit) by $2,400 (40 × $60). On September 8, the customer discovers that 20 more phones from the September 1 purchase are slightly damaged. The customer decides to keep the phones but receives a sales allowance from CBS of $10 per phone. The following entry occurs for the allowance. Since the customer already paid in full for their purchase, a cash refund of the allowance is issued in the amount of $200 (20 × $10). This increases (debit) Sales Returns and Allowances and decreases (credit) Cash. CBS does not have to consider the condition of the merchandise or return it to their inventory because the customer keeps the merchandise. A customer purchases 55 units of the 4-in-1 desktop printers on October 1 on credit. Terms of the sale are 10/15, n/40, with an invoice date of October 1. On October 6, the customer returned 10 of the printers to CBS for a full refund. CBS returns the printers to their inventory at the original cost. The following entries show the sale and subsequent return. In the first entry on October 1, Accounts Receivable increases (debit) and Sales increases (credit) by $19,250 (55 × $350), the sales price of the printers. Accounts Receivable is used instead of Cash because the customer purchased on credit. In the second entry, COGS increases (debit) and Merchandise Inventory–Printers decreases (credit) by $5,500 (55 × $100), the cost of the sale. The customer has not yet paid for their purchase as of October 6. Therefore, the return increases Sales Returns and Allowances (debit) and decreases Accounts Receivable (credit) by $3,500 (10 × $350). The second entry on October 6 returns the printers back to inventory for CBS because they have determined the merchandise is in sellable condition at its original cost. Merchandise Inventory–Printers increases (debit) and COGS decreases (credit) by $1,000 (10 × $100). On October 10, the customer discovers that 5 printers from the October 1 purchase are slightly damaged, but decides to keep them, and CBS issues an allowance of $60 per printer. The following entry recognizes the allowance. Sales Returns and Allowances increases (debit) and Accounts Receivable decreases (credit) by $300 (5 × $60). A reduction to Accounts Receivable occurs because the customer has yet to pay their account on October 10. CBS does not have to consider the condition of the merchandise or return it to their inventory because the customer keeps the merchandise. On October 15, the customer pays their account in full, less sales returns and allowances. The following payment entry occurs. Accounts Receivable decreases (credit) for the original amount owed, less the return of $3,500 and the allowance of $300 ($19,250 – $3,500 – $300). Since the customer paid on October 15, they made the 15-day window, thus receiving a discount of 10%. Sales Discounts increases (debit) for the discount amount ($15,450 × 10%). Cash increases (debit) for the amount owed to CBS, less the discount. Summary of Sales Transaction Journal EntriesThe chart in Figure 6.12 represents the journal entry requirements based on various merchandising sales transactions.
Figure 6.12 Journal Entry Requirements for Merchandise Sales Transaction. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Your TurnRecording a Retailer’s Sales TransactionsRecord the journal entries for the following sales transactions of a retailer.
Solution
What is recorded when a periodic inventory system is used?In a periodic inventory system, no continuous record of changes is kept. The yearly inventory purchases are recorded in the purchases account, which is a ledger listing all inventory purchases and their costs.
What account is debited when recording a inventory when using a periodic inventory system?Periodic inventory system uses the purchases account when there is purchases of merchandise. This is debited at that time and would not be credited when there is sales.
Is merchandise inventory used in periodic inventory system?Under periodic inventory procedure, the Merchandise Inventory account is updated periodically after a physical count has been made. Usually, the physical count takes place immediately before the preparation of financial statements.
What is periodic inventory system in merchandising?A periodic inventory system is an accounting method in which the cost of goods sold is determined periodically, usually annually and typically not more frequently than quarterly. This differs from a perpetual inventory system in which the cost of goods sold is determined as necessary or in some cases continually.
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When recording the sale of merchandise inventory using a periodic inventory system
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