A more complicated problem arises when it is desired to keep an account to show the total cash sales of all departments and at the same time to keep one sales account for each department, in which will be recorded both cash and charge sales. The information can be placed on the ledger, but not without destroying the usual meaning of the Cash Sales account. The purpose is accomplished by providing the sales journal with two total or general columns—in addition to the departmental columns—one for charge and one for cash sales, and by carrying a Cash Sales column in the cash book. The items in the Cash Sales column in the sales journal are distributed to the proper analytic columns for classification. At the end of the period the totals of these analytic columns (which include both cash and charge sales items) are posted to the credit of the proper departmental accounts in the ledger. The total of the Cash Sales column in the sales journal, however, is posted to the debit of Cash Sales in the ledger, which will be offset by a corresponding credit item from the Cash Sales column in the cash book. These two totals should agree provided the books are completely posted.
Sales to Branches.—Sales to branches are made on different bases in different concerns. Sometimes such sales are charged to the branch office at cost, sometimes at full selling price, and sometimes at a fictitious figure. The first method is theoretically the best, but is not always desirable because head offices frequently prefer to keep their branches ignorant of cost prices. For this reason such sales are frequently charged to the branch office at the regular selling price. By this method, however, the books of the head office record the goods as if actually sold, while in reality they have been merely transferred to a branch office. Consequently, the books show a profit which is not yet earned. In order to correct this, it is necessary at the end of the period to make an adjustment entry covering all goods still in the possession of the branch office unsold at that time. By billing the goods at a fictitious figure the branch is also kept in ignorance as to real profits, but proper adjustment should be made at the close of the period for the reason explained just above.
Whichever method is followed, sales to branches should always be kept separate from the regular sales accounts. Where shipments of goods to branches are frequent and a matter of regular routine, a branch shipments journal similar to the sales journal should be provided; otherwise a special column in the sales journal will suffice. The total of such sales should be credited to a Branch Shipments, Branch Consignments, or some similar account, so as not to confuse these transactions with regular sales. The subject of accounting for both domestic and foreign branches is treated in Volume II.
Consignment Sales.—Consignment sales—which in some respects resemble branch sales—should also be recorded separately from regular sales. This is so because the title to goods out on consignment is still vested in the consignor and no element of profit appears in the transaction until an actual sale is made. However, in the case of an occasional consignee as distinguished from a factor who deals regularly in consigned goods, it has usually been held that the title has passed to the consignee so far as the consignee’s dealings with all except the consignor are concerned. Only in this way can the interests of innocent third parties be adequately protected.
The accounting for consignments is treated in [Chapter XLVIII].
Instalment Sales.—The instalment sale should be treated in a different manner from regular sales because of certain special features connected with it. The chief characteristic of the instalment sale is the probability of the goods coming back into the seller’s possession through forfeiture because of non-payment of instalments, the profit on the transaction of course being affected thereby.
The sale of goods with the privilege of payment in instalments is a well-recognized custom in certain lines, particularly in the furniture, piano, book subscription, and similar businesses. To protect the seller, the sale contract almost invariably contains a clause to the effect that title to the goods shall remain in the seller until final payment has been made, that failure to pay any instalment when due shall result in the cancellation of the contract, and that in such case the goods shall be returned to the seller. Experience with this class of sales shows that a large number of contracts are forfeited with or without return of the goods. Where the goods are returned, there is frequently a large loss through depreciation, the returned goods having to be treated as second-hand. In some instances, to enforce return of the goods might entail greater expense than loss of the goods themselves. These are, of course, questions of business policy rather than of accounting, although the results shown by the accounting department enter into their settlement.
Accounting for Instalment Sales.—The accounting for sales under the instalment plan is not different from accounting for other sales. They are, in their first record, charged to the customer and credited to Sales or various departmental sales accounts. If the goods are forfeited and returned, the record is to Returned Sales for the debit and the customer is credited for the unpaid instalment. Whatever profit or loss there may be on the transaction will be shown in the Profit and Loss account when the inventory is taken and the returned goods are appraised. If the customer fails to pay his instalments but does not return the goods, the loss is one from bad debts.
Separation of Instalment from Regular Sales Records.—Where both instalment and regular sales are made, as is usually the case since few concerns limit their activities entirely to the instalment method, it is best to keep a separate instalment ledger with a controlling account, called “Instalment Accounts Receivable” or “Instalment Contracts.” The two classes of customers should be kept separate because of the greater liability to loss in the one class than in the other. Before profits for the period can be correctly determined, it is necessary to estimate the probable loss on contracts closed during the period. In the balance sheet separate showing should be made of the reserve for this class of accounts receivable and the reserve for the other class. The estimated loss on the instalment accounts is of course a figure based upon experience, but a conservative policy requires that the amount should be fairly liberal.
Delinquency Records.—Forfeiture of contracts is not usually enforced upon first failure to pay an instalment, but such delinquencies should be brought to the attention of the management and particularly of the credit and collection department. Delinquency may even be recorded in the books by transfer from the Instalment Accounts Receivable to a “Delinquent Instalment” account. This makes an up-to-date analysis of the Instalment Receivable account and so furnishes a better basis for estimating losses from bad debts than where no separation is made.