Deborah teaches college Accounting and has a master's degree in Educational Technology.
When a business sells a product or service, it must record the sale as well as the cash it receives from its customer. In a departmental system, a company must track these items separately. Learn how this system works with this lesson.
Departmental Sales and Cash Receipts
Ms. I. Shoppe owns the Foods R Us store, which sells meats and bakery items in two separate departments. She knows how much she is selling overall, but she wants a way to keep track of her sales and cash receipts for each department. Let's investigate how Ms. I. Shoppe can accomplish this objective.
Recording Departmental Sales
In accounting, sales revenue must be recorded when the product is sold to the consumer or when the service has been completed. This is known as the revenue recognition principle. Sales revenue represents the amount of income that a company receives when it sells a product or provides a service. Recording a sale does not always happen when cash is received. Sometimes payment is received in the future for a sale made on account, or not at all. When a sale is made on account, the purchaser receives the goods or services at the time of purchase, but the seller provides them with a period of time in which to pay the outstanding amount. The number of days to pay varies from company to company, but it's usually between 30 and 45 days after the sale is made. Since Foods R Us has two departments, it would require two separate sales accounts to record its revenue, one for the meat department and the bakery.
Recording Cash Sales
Cash sales to customers are recorded in a company's cash receipts journal. This journal tracks details about specific sales, such as the date, amount (including sales tax), department, and customer discounts associated with the transaction. The cash receipts journal may also include details about the receipt of cash from customers who are paying off the balance on an outstanding debt to the company. If a company sells goods or services on account, which means the customer will pay at a future date, then the amount that a customer owes a company is known as an accounts receivable. Let's assume that June 8th cash sales for Foods R Us revealed the following information: Sales - Meats = $4,500, Sales - Bakery = $1,750, and $550 was received from B. Jones for a sale made on June 1st.
By recording sales by department, Ms. I. Shoppe can determine that meat sales totaled 72% ($4,500 / $6,250) of sales and the bakery accounted for 28% ($1,750 / $6,250) of the day's sales. This detailed information can assist Ms. I. Shoppe in managing her business more efficiently. For example, she can compare each department's sales to her budget, identify significant differences, and formulate strategies to address them.
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In order to update her accounting records, Ms. I. Shoppe must create a journal entry to record the day's cash sales and all cash received from customers from past sales on account. A journal entry shows the impact of a transaction on the accounting records. In a departmental system, the sales for each department would be recorded separately. The journal entry that Ms. I. Shoppe would record for the June 8th cash receipts activity would be this:
Sales made to customers who pay at a future date are recorded in the company's sales journal. The sales journal records the date of the sale, the name of the customer, the amount of any sales tax, the total amount owing, and the sales by department. Let's assume that the hospitality teacher from School District #33 purchased $350 of items from the meat department and $225 of items from the bakery department of Foods R Us on June 20th. Since the school board has an account with Foods R Us, the payment for this sale will be made at the end of June.
Note that the amount that School District #33 owes to Foods R Us would be recorded as an accounts receivable as it did not pay for the items at the time of sale, but plans to pay the outstanding amount at the end of June.
The journal entry to record this sale on account would be this:
Sales revenue must be recorded at the time a product is sold or when a service is completed to satisfy the revenue recognition principle. Cash sales are recorded in the cash receipts journal and sales on account, where payment will be made at a future date, are recorded in the sales journal. Recording sales by department assists management in comparing actual to budgeted sales and making adjustments where required.
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