Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

The various types of analyses, both in journals and in ledgers, make use of either (or both) horizontal or vertical distribution. In most forms or records, except in banking and allied institutions, the generally accepted practice is to reserve vertical distribution for showing chronological sequence, and horizontal distribution for any other kind of classification. The reason for this lies in the fact that the time basis requires practically unlimited space and the requirement can be met only by vertical distribution, consecutive pages being considered as the continuation of preceding pages. Horizontal distribution, on the other hand, is limited to the width of the page.

By reference to [Chapter XLI], “Handling the Cash,” it will be noted that for the purpose of horizontal classification the sheet contains a number of money columns, each headed by an individual class title, and that each item is first entered in the general column and then extended to one of the subsidiary columns. This serves as a check against error, since it is evident that the total of the general column must be equal to the sum of the totals of the other columns, thus furnishing a fair though not complete proof that the extensions have been made correctly. All books where analytical processes are involved should provide some kind of internal check. The student should refer to Chapters [XVIII], [XIX] and [XX], where form of analytic journals and explanation of them were given.

Use of the Sales Ticket in Analysis.—Since the sales invoice or ticket is the basis for entry and analysis in the sales journal, it must give on its face the information necessary for making the analysis. In accordance with the basis of classification used, it should show the department number, the kind of goods sold, whether for cash or credit, etc. The use of invoices with printed department numbers and of different colors for cash, charge, and C.O.D. sales, aid in making the record effective.

In a business of any size, the entry on the main sales journal only shows the total for the day’s sales. The sales tickets lend themselves easily to grouping, and therefore a day’s sales may be analyzed by sorting and grouping the sales tickets. Under any method of this sort, of course, each ticket must be used for the record of only one class of goods. Thus the totals of each of these sorted groups may be entered in the sales journal at the end of the day. Besides furnishing the totals for each group of sales, the individual tickets are used also for the purpose of posting the sales to the accounts of the particular customers.

After use in these various ways the tickets are filed away in binders for reference. Thus, the main books are freed of a mass of comparatively unimportant detail, to which it is necessary to refer only in rare cases.

Analyzing Sales Returns.—Attention should be called to the necessity of analyzing returned sales, allowances, and rebates, on the same basis as sales. Provision should also be made for a separate sales returns journal since the ordinary journal does not lend itself economically to an analyzed record of that kind.

Purchases and Returned Purchases.—It has been pointed out that the basis of classification of sales in the ledger determines the analysis in the sales journal. The same classification should also be applied to purchases, returned purchases, and inventories, because only in this way is it possible to determine the profit from the different classes of merchandise.

Similarly, all inward costs, such as duty, freight, insurance, handling, etc., which enter into the cost of goods sold must be analyzed on the same basis and apportioned to each group on some equitable basis. Because of practical difficulties, however, this analysis or apportionment usually is not made upon the first entry of these items on the records, but a distribution on a more or less arbitrary basis is made at the close of the period. In a large concern where very detailed information as to results is desired, an analysis of many other expenses and costs applicable to each sales group is made. Such a distribution of expense, however, leads into the field of cost accounting which is beyond the scope of the present discussion.

The Handling of Cash Sales.—Where an analysis by kind of commodity is unnecessary, a simple method of booking cash sales is by entry in a “Sales” column provided in the cash book, the total of which is posted to the credit of “Sales” in the ledger. Under this method, cash sales need not be entered in the sales journal. In previous chapters where the functions of the subsidiary journals were discussed, the practice of entering a cash sale in both cash book and sales journal was advised, so that the summaries of each may show true totals for those groups of business activities. However, this principle is often departed from and the method just described for booking cash sales is followed. Where an analysis of the sales is desired, the practical difficulty of providing analysis columns in the cash book for the cash sales in addition to analysis columns in the sales journal for the sales on account gives added weight to the principle stated.

It is sometimes desirable to distinguish between cash and charge sales, thus requiring two accounts, the “Sales on Account” and the “Cash Sales,” to show the total sales for the period. This is easily accomplished by the use in the sales journal of the “On Account” and “Cash” columns whose totals furnish the amounts for posting to the two ledger accounts. Even were it desired to have two sales accounts, the cash and charge, for each department, the necessary information can be secured by providing in the sales journal two columns, a cash and a charge for each department and posting their totals to the two sales accounts carried for each.