Types of Ledgers

The information in the various Journals is transferred to the ledgers. There are three types of ledgers.

1. Sales Ledger
In the sales ledger are the individual accounts of your Accounts Receivable (Debtors). The information in these accounts are derived from the Sales Journal and the Sales Return Journal

2. Purchases Ledger
The individual accounts of your Accounts Payable (Creditors). The information in the Purchase Journal or Purchases Return Journal is transferred to this Ledger.

3. General Ledger
All other accounts not recorded in the Sales or Purchase Ledger is recorded in the General Ledger.

Merchandising Transactions

Merchandising Transactions requires that you understand how to record the asset of stock. The asset of stock is recorded in four different accounts. These accounts are purchases, sales, sales return and purchases accounts. Let us first look at a definition for these terms and then the use of the accounts.

Purchases - in the accounting sense, are only those items of merchandise inventory that a firm buys to resell to customers in the normal course of business.


Purchases Return – Merchandise purchased for resale would not always be as what the buyer expects. In this regard, buyers can return goods purchased due to a lot of reasons, for example, due to defects, wrong specifications, poor quality, etc. When merchandise bought is returned, or an allowance is requested, the buyer informs the seller in writing. The communication is done usually through the buyer’s printed business form called debit note.

Sales - on the other hand, represent the selling price of merchandise previously bought and then sold.In the income statement, Sales is shown as an income item from which the cost of goods sold (consisting of merchandise inventory beginning and end and net cost of purchases), was deducted, the difference being the gross profit.


Sales Return - When the customer returns goods to the seller or requests for a deduction from the price of the goods delivered to him, the seller accepts the return or grants the request through a credit note.

The sale of merchandise may be for cash or on account.An invoice supports every sale.The seller’s sales invoice is the buyer’s purchase invoice.When a sale is for cash, the seller receives money in return for his merchandise.When the sale is made on credit, the seller acquires a receivable or right to collect from the buyer.


The uses of the merchandising accounts are:

1. Sales Account – Sales of merchandise are recorded in this account at selling prices.This is a temporary or nominal account representing income from selling of merchandise.This account has a normal credit balance.

2. Purchases Account – This is a temporary account to which the cost of goods bought during the period is debited.This account usually has a debit balance at the end of the accounting period.

3. Sales Return Account – This account is debited for all the merchandise returned by customers.The debit entry is at the original selling price of the merchandise.This account is also being used for all goods delivered to customers but is found to be defective or not as ordered and still the buyer desiring to retain the goods as is. The customer in this case is normally permitted to deduct a certain amount from the selling prices of the goods delivered.

4. Purchases Return Account – Goods bought and returned to supplier, or goods bought and received as defective, or not as ordered, when not returned to the supplier but is subjected to a certain reductions from their acquisition prices.These deductions and returns of purchased goods are credited to this account. Purchase returns and allowances account is a deduction from the Purchases account.

These accounts were briefly looked at above but let us now have a further look at these accounts as we take into account the double entries needed to record both credit and cash transactions in these accounts.

Purchases Transactions

Accounting Entries Used to Record the Purchase and Payment of Goods
1) When goods are purchased with cash, the following entry is necessary:
o Debit Purchases
o Credit Cash

2) When goods are purchased on credit, the following entry is necessary:
o Debit Purchases
o Credit Accounts Payable

3) When goods are purchased on credit, but are paid back early due to a cash discount incentive, the following entry is necessary.
o Debit Accounts Payable
o Credit Cash 
o Credit Purchases Discount (discount received).

Purchases Discounts (Discount Received)

A seller will often offer a cash discount to the buyer for an early payment. Credit terms are the conditions for the payment agreed upon by the buyer and the seller. Cash discounts are stated in a fractional form with the percentage of discount in the numerator and the number of days in the denominator. The credit period, or number of days a buyer can pay without incurring a finance charge, is stated in NET days or n/days.

Example Terms 3/15, n/60 means a buyer will receive a 3% cash discount if paid within 15 days of the invoice date, and the buyer has a maximum of 60 days to pay the entire debt amount.

Purchases Returns Rules For Recording Returns For Goods Purchased On Credit
1) If merchandise is returned or a price adjustment is necessary, the buyer should.
o Debit Accounts Payable
o Credit Purchases Returns account

2) When the returned goods were purchased on credit, and a cash discount for early payment is available, the discount only applies to the price of the goods that are kept, (in addition, discounts are not taken on freight costs).

Sales Accounting

When goods are sold for cash or on credit, the Sales account should be credited. To encourage early payment of goods purchased on credit, the seller will often offer a cash discount. These discounts are recorded in the Sales Discounts Account (Discount Allowed). When goods are returned or an allowance is requested, the adjustment is made to the Sales Returns account. All sales discounts, returns, and allowances reduce sales revenues.

Sales Accounting - Rules for Recording Sales Transactions
1) When goods are sold and payment is made in cash.
o Debit Cash
o Credit Sales
2) When goods are sold on credit.
o Debit Accounts Receivable
o Credit Sales

Sales Accounting - Recording Sales Discounts

3) When a buyer takes advantage of a cash discount.
o Debit Cash
o Debit Sales Discount (Discount Allowed)
o Credit Accounts Receivable

Example Invoice for $950 with terms 3/15, n/30 is paid early by the buyer. o Debit Cash $921.50 o Debit Sales Discount $28.50 o Credit Accounts Receivable $950

SALES ACCOUNTING - RECORDING SALES RETURNS 

When a seller grants a return or an allowance,

• o Debit Sales Returns
• o Credit Accounts Receivable

A buyer of goods can only take a cash discount on the goods that are actually kept (cash discounts do not apply to freight either).

Example A seller issues a credit note for $70 of goods that were not ordered by ABC company. If the return is granted, the following entry is necessary. Debit Sales Returns $70 Credit Accounts Receivable ABC company $70

Sales Accounting

Manufacturers and wholesalers often reduce catalogue list prices by allowing trade (or quantity) discounts. The discounts vary depending on customer and order size. Trade discounts permit flexible prices without having to print new catalogues. Trade discounts are not reflected in accounting records, only the agreed upon price between a buyer and seller is recorded.

Transportation Costs

Whenever goods are sold, the buyer and the seller must agree upon who pays shipping costs. When goods are shipped FOB shipping point, the buyer agrees to pay for shipping costs and ownership passes to the buyer when the merchandise is delivered to the shipper. When goods are shipped FOB destination, the seller agrees to pay for transportation costs and ownership of goods passes to the buyer when the goods are delivered.

Activity 2 - A A Local Book Shop ordered 600 copies of an introductory accounting textbook from a publisher on March 21, 2011. The books were delivered on September 12, at which time a bill was sent requesting payment of $60 per book. However, a 5% discount was allowed if the publisher received payment by October 15. Local Book Shop sent the proper payment, which was received by the Publisher on October 10. On December 18, Local Book Shop returned 60 books to the publisher for a full cash refund. 1. Prepare the journal entries (if any) for the publisher on a. March 21 b. September 12 c. October 10  d. December 18. Include appropriate narratives.

Accounts Receivable and Accounts Payable

These accounts deal with our debtors (customer who we sell our goods and service to on credit) and our creditors (suppliers we purchase our goods and services from on credit). The list of your accounts receivables account are recorded in your Sales Ledger and Accounts Payable accounts in your Purchases Ledger

Let us now continue with our worked example from Topic 2.1 above. You now need to transfer the information in the various journals to the different ledgers and accounts. 


Begin with the Sales and Sales Return Journals. The information included in these two journals is transferred to the respective accounts in the sales ledger with the totals transferred to the general ledger. 

Sales Journal
Date	Details	Folio No.	Invoice No.	Amount
2006				$
Sept 25	Malika Diantha	SL	5324	422.85
Sept 27	Oren Peters	SL	249	249.00
	Total Credit Sales for the month	GL		671.85

Sales Return Journal
Date	Details	Folio No.	Note No.	Amount
2006				$
Sept 23	Malika Diantha	SL	1235	72.00
Sept 29	Oren Peters	SL	1236	137.70
	Total Sales Return	GL		209.70

Sales Ledger
Oren Peters
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
Sept 27	Sales	SJ	249.99	Sept 29	Sales Returns	SRJ	137.70
Malika Diantha
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
Sept 25	Sales	SJ	422.85	Sept 23	Sales Return	SRJ	72.00

Purchases Journal
Date	Details	Folio No.	Invoice No.	Amount
2006				$
Sept 7	AJ Wholesale		1654	272.80
Sept 9	A M Byden		234	248.80
	Total Credit Purchases for the month			521.60

Purchase Return Journal
Date	Details	Folio No.	Note No.	Amount
				$
Sept 17	A M Byden	PL	236	94.00
Sept 25	AJ Wholesale	PL	237	59.00
	Total Purchases Returns	GL		153.00

Purchases Ledger
A.M. Bryden
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
Sept 17	Purchases Return	PRJ	59.00	Sept 9	Purchases	PJ	248.80
Sept 25	Bank	CB	100.00
AJ Wholesale
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
Sept 25	Purchases Return	PRJ	94.00	Sept 7	Purchases	PJ	272.80
Sept 27	Bank	CB	75.00
J Smith
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
				Sept 1	Balance	b/d	1 500.00

General Journal
Date	Details	Folio No.	Debit	Credit
2006			$	$
1 Sept	Cash	CB	150.00
	Bank	CB	800.00
	Motor Van	GL	2 500.00
	Loan: J Smith	PL		1 500.00
	Equipment	GL	1 200.00
	*Capital	GL		3 150.00
	Assets and Liabilities as at 1 Sept 2006		4 650.00	4 650.00

||||||||||||||||||||||||||||General Ledger

Motor Van

Date

Details

Folio

Amount

Date

Details

Folio

Amount

2006

$

2006

$

Sept 1

Balance

b/d

2 500.00

Capital

Date

Details

Folio

Amount

Date

Details

Folio

Amount

2006

$

2006

$

Sept 1

Balance

b/d

3 150.00

Equipment

Date

Details

Folio

Amount

Date

Details

Folio

Amount

2006

$

2006

$

Sept 1

Balance

b/d

1 200.00

Sales Account

Date

Details

Folio

Amount

Date

Details

Folio

Amount

2006

$

2006

$

Sept 21

Cash

CB

48.00

Sept 30

Cash

CB

104.00

Sept 30

Total Credit Sales

SJ

671.85

Purchases Account

Date

Details

Folio

Amount

Date

Details

Folio

Amount

2006

$

2006

$

Sept 30

Total Credit Purchases

PJ

521.60

Sales Return Account
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
Sept 30	Total Returns	SRJ	209.70
Purchases Return Account
Date	Details	Folio	Amount	Date	Details	Folio	Amount
2006			$	2006			$
				Sept 30	Total Returns	PRJ	153.00

Cash Book
Date	Details	Folio	Discount	Cash	Bank	Date	Details	Folio	Discount	Cash	Bank
2006			$	$	$	2006			$	$	$
Sept 1	Balance	b/d		150.00	800.00	Sept 25	AM Byden	PL			100.00
Sept 21	Sales	SL		48.00		Sept 27	AJ Wholesale	PL			75.00
Sept 30	Sales	SL		104.00

Assignment