Chapter 7, Problem 1QS

To determine

Journalization: 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: The rules for journal entry are defined by 5 accounting components,

• 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 of recording 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

1.

Sold $20,000 of merchandise, which cost $15,000, on MasterCard credit cards. MasterCard charges a 5% fee.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Cash		19,000
	Credit Card Expense		1,000
	Sales			20,000
	(Being sales of $20,000 is recorded payment for which is made with MasterCard credit card )

• 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 a revenue account, it is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Cost of Goods Sold		15,000
	Merchandise Inventory			15,000
	(Being cost of goods sold is recorded )

• Since the cost of merchandise sold is $15,000 and company is using perpetual inventory system
• Cost of Goods Sold account is debited by crediting merchandise inventory accounts as it is an asset account and it has decreased.

2.

Sold, $5,000 of merchandise, which cost $3,000, on an assortment of bank credit cards. These cards charge a 4% fee.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Cash		4,800
	Credit Card Expense		200
	Sales			5,000
	(Being sales of $5,000 is recorded payment for which is made with bank credit cards )

• 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 a revenue account, it is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Cost of Goods Sold		3,000
	Merchandise Inventory			3,000
	(Being cost of goods sold is recorded )

• Since the cost of merchandise sold is $3,000 and company is using perpetual inventory system.
• Cost of Goods Sold account is debited by crediting merchandise inventory accounts as it is an asset account and it has decreased.