Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 221

are now focusing on sales of merchandise rather than services. Because the operating

activities of a merchandise business differ from those of a service business, the chart

of accounts will also differ. For example, instead of fees earned, sales of merchandise

are recorded in a sales account.

To illustrate, assume that on January 3 Online Solutions sells merchandise costing

$1,200 for $1,800, with the customer paying in cash. The entry to record the sale of

$1,800 is as follows:

Jan. 3 Cash 1,800

Sales 1,800

Under the perpetual inventory system, the cost of merchandise sold and the re-

duction of merchandise inventory on hand are recorded at the time of sale. In this way,

the merchandise inventory account indicates the amount of merchandise on hand at

all times. Thus, on January 3, Online Solutions also updates the merchandise inventory

account with the following entry:

Jan. 3 Cost of Merchandise Sold 1,200

Merchandise Inventory 1,200

In recent years, a large percentage of retail sales has increasingly been made to

customers who use credit cards such as VISAorMasterCard. How do merchandise

businesses record sales made with VISA or MasterCard? Such sales are recorded as

cash sales. This is because the retailer normally receives payment within a few days of

making the sale. Specifically, such sales are normally processed by a clearing-house

that contacts the bank that issued the card. The issuing bank then electronically trans-

fers cash directly to the retailer’s bank

account. Thus, if the customer in the pre-

ceding sale had used MasterCard to pay

for their purchase, the sale would be

recorded exactly as shown above. Any

fees charged by the clearing-house or is-

suing bank are periodically recorded as

an expense.

Sales of merchandise on account

would be recorded in the same manner

as cash sales, except that Accounts

Receivable rather than Cash is debited

at the time of sale. An individual ac-

count for each customer is maintained

in a subsidiary ledger. The total of the

subsidiary ledger is represented in the

general ledger by a controlling account.

In the case of the accounts receivable

subsidiary ledger, the accounts receiv-

able account is the controlling account.

Likewise, a subsidiary ledger is also

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