Problem 13 - Accounting

Question

Journalize the entries for the following transactions: a. Sold merchandise for cash, \(\$ 18,500\). The cost of the merchandise sold was \(\$ 11,000\). b. Sold merchandise on account, \(\$ 12,000\). The cost of the merchandise sold was \(\$ 7,200\). c. Sold merchandise to customers who used MasterCard and VISA, \(\$ 115,200\). The cost of the merchandise sold was \(\$ 70,000\). d. Sold merchandise to customers who used American Express, \(\$ 45,000\). The cost of the merchandise sold was \(\$ 27,000\). e. Received an invoice from National Credit Co. for \(\$ 5,600\), representing a service fee paid for processing MasterCard, VISA, and American Express sales.

Step-by-Step Solution

Answer

Record each sale using appropriate accounts and amounts, ensuring costs are debited to cost of goods sold. Adjust for credit card fees.

Step 1: Journalize Cash Sale

For the transaction where merchandise was sold for cash ($18,500), we need to record two entries. First, the cash account is debited for the amount received: Debit: Cash $18,500 Credit: Sales Revenue $18,500 Second, to account for the cost of the sold merchandise: Debit: Cost of Goods Sold $11,000 Credit: Inventory $11,000.

Step 2: Journalize Sale on Account

For the sale made on account ($12,000), journalize the revenue and the cost separately. First, recognize the sale: Debit: Accounts Receivable $12,000 Credit: Sales Revenue $12,000 Then record the cost of goods sold: Debit: Cost of Goods Sold $7,200 Credit: Inventory $7,200.

Step 3: Journalize Mastercard and VISA Sale

For sales using MasterCard and VISA ($115,200), record the transaction as follows: Debit: Cash $115,200 Credit: Sales Revenue $115,200 Also, record the cost of goods sold: Debit: Cost of Goods Sold $70,000 Credit: Inventory $70,000.

Step 4: Journalize American Express Sale

For merchandise sold using American Express ($45,000), the entry is: Debit: Cash $45,000 Credit: Sales Revenue $45,000 And for the cost of goods sold: Debit: Cost of Goods Sold $27,000 Credit: Inventory $27,000.

Step 5: Journalize Service Fee Invoice

For the receipt of an invoice from National Credit Co. for service fees ($5,600), journalize as follows: Debit: Credit Card Expense $5,600 Credit: Accounts Payable $5,600.

Key Concepts

Cash Sales

Cash sales are transactions where merchandise is sold and the payment is received immediately in cash. This type of sale has a direct impact on the journal entries of a business. When recording cash sales in the accounting books, it is crucial to understand how it affects both the cash account and sales revenue.

In the context of a cash sale, two significant entries are made. First, the cash account is debited to reflect the increase in cash. This is because cash is an asset, and when it comes in, it adds to the company's resources. This is then paired with a credit to the sales revenue account, recognizing that the company has earned income from the sale. This credit increases the sales revenue, reflecting the profit the company has made from this transaction.

Another aspect of cash sales is accounting for the cost of the merchandise sold. The cost of goods sold (COGS) entry is crucial as it reduces the inventory asset account. This requires a debit to the COGS and a credit to the inventory account. This reflects the reduction in inventory and acknowledges the expense associated with selling the goods.

Credit Sales

Credit sales occur when goods or services are sold on account, meaning the customer does not pay immediately. Instead, the company agrees to bill the customer and receive payment at a later date. This concept is important as it affects how revenue is recognized and recorded.

When a credit sale is made, the accounting records need to capture both the revenue generated and the receivable to collect. This involves debiting the accounts receivable, which shows that a certain amount is owed to the business. Simultaneously, a credit is made to the sales revenue, reflecting the income earned from the transaction.

The other component to consider with credit sales is the cost associated with selling the goods. Just like with cash sales, a debit entry is made to the COGS. This reflects the expense the company incurs for selling the merchandise. The inventory account is then credited since the goods are no longer on hand, reducing the value of inventory on the balance sheet.

Merchandise Inventory

Merchandise inventory is the account that tracks the value of the goods a business intends to sell. This is an important asset on a company's balance sheet, as it represents unsold goods that are available for sale. Effective inventory management is crucial for any retail or manufacturing business.

When merchandise is sold, the inventory account is affected. This transaction is recorded by making a credit entry to the inventory account, reducing its balance because the goods have been removed. At the same time, a corresponding debit entry is made to the cost of goods sold to reflect the expense incurred.

Properly managing inventory ensures that the business maintains adequate stock levels without over-investing in products that may not sell quickly. It also helps in predicting future purchasing needs and keeping track of which products are selling and which aren't, allowing for more strategic business decisions.

Cost of Goods Sold

The cost of goods sold (COGS) is a financial metric that reflects the direct costs involved in producing or purchasing the goods that a company sells. It is essential for calculating the gross profit, which is sales revenue minus COGS.

COGS typically includes the cost of materials and direct labor costs and is a critical figure in understanding a company's gross margin. When merchandise is sold, COGS is debited to show the cost associated with the sale. This step recognizes the expense of the inventory used and shifts the cost from an asset on the balance sheet to an expense on the income statement.

Tracking COGS is important for determining product pricing strategies and understanding overall business profitability. By analyzing COGS, managers can pinpoint inefficiencies in purchasing or production processes and adjust strategies to enhance margin performance.