Chapter 7, Problem 1PSB

To determine

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

► Assets: Increase in asset should be debit and decrease should be credit.

► Liabilities: Increase in liabilities should be credit and decrease should be debit.

► Equity: Increase in Equity should be credit and decrease should be debit.

► Expense: Increase in expense should be debit and decrease should be credit.

► Revenue: Increase in revenue should be credit and decrease should be debit.

Credit Card:

It refers to the card made of plastic and issued by a bank. It provides an individual to buy goods and services on credit when they have shortage of cash.

Perpetual Inventory System:

It refers to the system to record the transaction related to inventories at the time of their occurrence. Each sale and purchase is recorded at the time they occurred.

To prepare: Journal entries for the given credit card sales transactions.

Explanation of Solution

Aug 4 sold $3,700 of merchandise on credit (that had cost $2,000) to M.C.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 4	Accounts Receivables (M.C)		3,700
	Sales			3,700
	(Being sales of $650 on credit is recorded )

Table (1)

• Since, the sales of merchandise on credit will increase the value of accounts receivables and accounts receivable is an asset account. It is debited when it is increased.

• Since, the sales of merchandise would increase the value of sales in the company and sales is revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 4	Cost of Goods Sold		2,000
	Merchandise Inventory			2,000
	(Being cost of goods sold is recorded )

Table (2)

• Since, the cost of merchandise sold is $2000 and company is using perpetual inventory system, it is debited.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

Aug 10 sold $5,200 of merchandise (that had cost $2,800) to customers who used their commerce bank credit card.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 10	Cash		5,044
	Credit Card Expense $\left(\$5,200\times 0.03\right)$		156
	Sales			5,200
	(Being sales of $5,200 is recorded payment for which is made with MasterCard credit cards )

Table (3)

• Since, payment with credit cards includes immediately recognition of cash to the company and cash is an asset account. It is debited when it is increased.

• Since payment with credit card includes some charges for the company and it is an expense account. It is debited when it is increased.

• Since, sales of merchandise have been made and sales is revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 10	Cost of Goods Sold		2,800
	Merchandise Inventory			2,800
	(Being cost of goods sold is recorded )

Table (4)

• Since, the cost of merchandise sold is $2,800 and company is using perpetual inventory system, it is debited.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

Aug 11 sold $1,250 of merchandise (that had cost $900) to customers who used their G.M cards.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 11	Accounts Receivable		1,225
	Credit Card Expense $\left(\$1,250\times 0.02\right)$		25
	Sales			1,250
	(Being sales of $1,250 is recorded payment for which is made with MasterCard credit cards )

Table (5)

• Since payment is requested and has not received, it will be treated as accounts receivable. So, debit the Accounts Receivable account.

• Since payment with credit card includes some charges for the company and it is an expense account. It is debited when it is increased.

• Since sales of merchandise have been made and sales is revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 11	Cost of Goods Sold		900
	Merchandise Inventory			900
	(Being cost of goods sold is recorded )

Table (6)

• Since, the cost of merchandise sold is $900 and company is using perpetual inventory system, it is debited.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

Aug 14 received M.C’s check in full payment for payment for the purchase of Aug 4.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 14	Cash		3,700
	Account Receivable (M.C)			3,700
	(Being payment from an account receivable is recorded)

Table (7)

• Since, payment from an accounts receivable will increase the cash and cash is an asset account, it is debited when it is increased.

• Since, payment from an accounts receivable will decrease the accounts receivable and accounts receivable is an asset account, it is credited when it is decreased.

Aug 15 sold $3,240 of merchandise (that had cost $1,758) to customer who used their G.M cards.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 15	Accounts Receivable		3,175.2
	Credit Card Expense$\left(\$3,240\times 0.02\right)$		64.8
	Sales			3,250
	(Being sales of $3,250 is recorded payment for which is made with MasterCard credit cards )

Table (8)

• Since payment is requested and has not received, it will be treated as accounts receivable. So, debit the Accounts Receivable account.

• Since payment with credit card includes some charges for the company and it is an expense account. It is debited when it is increased.

• Since sales of merchandise have been made and sales is revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 15	Cost of Goods Sold		1,758
	Merchandise Inventory			1,758
	(Being cost of goods sold is recorded )

Table (9)

• Since, the cost of merchandise sold is $2000 and company is using perpetual inventory system, it is debited.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

Aug 22 wrote off the account of C.C against the allowance for doubtful accounts. The $498 balance in C.C’s account stemmed from a credit sale in November of last year.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 22	Allowance for Doubtful Account		498
	Accounts Receivable			498
	(Being write off of uncollectible accounts receivable is recorded)

Table (10)

• Since in allowance method of accounting for accounts receivable the amount for bad debt expense is deducted from allowance for doubtful account which is a contra asset account. It is debited when it s decreased.

• Since in allowance method of accounting for accounts receivable the deduction is made against the account receivable account which is an asset account. It is credited when it s decreased.

Received payment from A.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Apr 20	Cash		4,400.2
	Accounts Receivable			4,400.2
	(Being sales of $5,600 is recorded payment for which is made with credit cards )

• Cash is an asset account and it is debited when it is increased. Here cash payment is received. So, debit Cash account.

• Accounts Receivable is an asset account. Since amount is received against accounts receivable, assets has decreased. So, credit the Accounts Receivable account.