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Recording Departmental Cash Receipts, Sales & Allowances

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Lesson Transcript
Instructor: Kim Adams-Francis
This lesson will cover how to use a double-entry accounting system. You are going to learn several new accounting terms and re-familiarize yourself with previously learned terms. Then, we'll put it all together so you can handle more of your business' accounting needs.

Recording

Your business is starting to take off and your sales are starting to add up. You know you need to record them in your accounting system, but where? And how? This lesson will explain the accounts you need to properly record your sales transactions and how they fit into your already existing accounting system.

First things first: what kind of sales transactions do you have? Sales generally fall into two categories: cash and credit. Cash transactions include sales done with cash, checks, and credit cards. Credit transactions mean you extend credit to your customers, allowing them to pay later. How your customer chooses to pay determines how you record the transaction.

Cash & Credit

To record a cash sale, debit the asset Cash and credit the account Sales. This reflects the increase in the Cash asset as well as the increase in the Owner's Equity account Sales, which keeps the accounting equation balanced. An example of a transaction for $500 in sales as recorded in the General Journal would be:

Cash................................... $500
…..Sales.............................. $500

Now let's say this $500 sale took place three weeks ago, but instead of paying cash, your customer, Joe Smith, charged it to his account. Since in accrual accounting, sales are recorded when they are made and not when payment is received, the initial transaction for the sale would debit Joe Smith's Account Receivable account, and credit the Sales account:

Accounts Receivable - Joe Smith............................... $500
…..Sales...................................................................... $500

Three weeks later, you receive a check from Joe Smith for $500. Since you already credit the sales account when the sale took place, you just have to adjust Joe Smith's account to reflect his payment, and adjust your bank balance to reflect the receipt of the payment. This is accomplished by debiting the Cash account and crediting Joe Smith's Accounts Receivable account:

Cash.................................. $500
…..Accounts Receivable - Joe Smith................ $500

Sales Returns and Allowances

Sometimes products are defective or just aren't what the customer had in mind. When this happens, a customer might ask to return the product or request an adjustment in the sale price. How this transaction is recorded depends on whether the sale was a cash or credit transaction.

Let's say Joe Smith's product had a defect and he wants to return the item. If Mr. Smith charged the product to his account, the account Sales Returns and Allowances would be debited and his Accounts Receivable account would be credited:

Sales Returns and Allowances................................ $500
…..Accounts Receivable - Joe Smith....................... $500

Notice that the account Sales was not adjusted. This is because Sales Returns and Allowances is a contra account for the Sales account. A contra account is used to show any adjustments to the account to which it is attached. A contra account will always have the opposite balance to its paired account, which is why Sales Returns carries a debit balance, to offset the credit balance of the account Sales.

If Joe Smith bought his item with cash, the return of the item is treated differently in the accounting system. The account Sales Returns is debited and a special payable account is set up and credited:

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