Importance of the Sales Department.—Of the major departments into which business activities are commonly classified, the selling department ranks first in point of relative importance. Regardless of the efficiency secured in the other branches, regardless of the economy in buying and the excellence of administration, the life of a business largely depends upon the results obtained by the selling division. Since the sales department plays such an important part in the development of the business, it is evident that the accounting and financial problems connected with sales should be given careful attention and should be handled by the most scientific and up-to-date methods.
As before stated, one of the most important principles of modern accounting is that the system by which the records are to be kept must be planned in advance. The modern accountant must first know the kind of information that is desired and he then can classify the accounts so that the information may be obtained from the ledger or other records at any time, with the least possible effort.
Basis for Sales Classification.—The majority of enterprises at the present time deal in a number of commodities, the kind, quality, and grades of which are of such variety that careful classification is imperative. Formerly all goods sold were classed together under a single title “Merchandise,” with the result that no detailed information concerning the sale of particular goods, qualities, and grades was available and the manager or proprietor was unable to study the movement of specific classes of commodities.
Applying the principle of classification to sales, the basis for classification depends on the character of the business and the nature of the goods sold. Where the commodities dealt in are of such variety that it is impracticable to have a separate account for each kind, a more general grouping by classes may be necessary. Where the concern manufactures some of its commodities and buys the remainder in the open market, an analysis of sales on the basis of “own” product and “other” product may be wanted. Sales may be classified also on the basis of the sales contract, as cash, credit, instalment, sales to branches, consignment sales, approval sales, etc. Accounting problems in connection with these various types of classification will be treated in the present chapter.
Principles Governing Analysis in Books of Original Entry.—It is evident that the kind of classification shown in the ledger determines the journal analysis. That is to say, the analysis in books of original entry, and therefore their columnar ruling, always depends upon the way in which the accounts are classified and grouped in the ledger.
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.
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.
Chief Considerations in Handling Instalment Sales.—From the accounting standpoint, the chief question is that of making the estimate for loss from uncollectible accounts. From the standpoint of financial management, instalment sales present the problems of passing on credits before taking the risks and afterwards of pushing collections so as to prevent, whenever possible, forfeiture and consequent loss. It is not purposed to treat of these phases here, for which the student is referred to standard works on credits and collections.
Sales for Future Delivery.—From a legal point of view, the receipt of a purchase order gives rise to certain rights and obligations enforceable at law between buyer and seller. While the seller may not be able to enforce specific performance of the contract, yet he is entitled to the damage incurred through nonperformance. Every merchant knows, however, that the cost of securing the remedy is usually higher than the resulting gain and, furthermore, an action against the customer frequently causes the loss of his trade.
Sales for future delivery do not always materialize, since either the buyer or the seller may wish to cancel the contract. A conservative policy therefore demands that the sale be not booked until delivery is made. The order, however, may be received in one fiscal period and the sale be credited to the period in which the goods are delivered, while the major part of the expenses in connection with the sale may have been incurred during the period in which the order was received. The current period then is charged with the expenses but does not receive the credit to which it seems entitled. Therefore, the portion of the selling expense incurred during the period in which the order was secured should be deferred to the period which receives the credit for the sale.
This policy should be followed even when the goods covered by the future sale are set aside specifically for future delivery and the sale should not be booked until delivery is made. At inventory time such goods should be included at cost, with the deferred expense charge as above. Occasionally an unscrupulous merchant in need of cash will bill such goods and discount the invoice; but for the reason given above such goods should not be charged to the customer until delivery is made.
Department Store Sales.—As indicated above, in a department store sales are usually classified by departments. The two classes of sales tickets, cash and credit, are sorted by departments and the totals are entered daily either in the sales journal or on the loose sales sheets which, when filed in a binder, make up the sales journal. At the end of the month the journal is posted to the various department sales accounts. Each day the entries on the sales journal are checked against the cashier’s record of cash received from sales and the bookkeeper’s record of charges posted to customers.
C. O. D. Sales.—For this class of sales the credit is booked in the usual way but the debit is made to a C.O.D. account. The packages are charged on the shipping department’s memorandum records to the various delivery men who are credited with the collections turned in. These collections form the basis for the credit to the C.O.D. account on the ledger. Any balance in the C.O.D. account shows the amount of the undelivered goods still on hand in the shipping department or on the wagons and therefore charged against the various drivers.
Approval Sales.—In many lines of business approval sales are common. Merchandising concerns frequently send goods to customers for trial and inspection, with the privilege of return if the goods prove unsatisfactory. Publishing houses often send out books—both single volumes and whole sets—with a few days’ examination privilege. This class of business is often handled in a rather unsystematic fashion. Usually it is impossible to discriminate among prospective customers, since offers of this kind must be made to all alike. Consequently the privilege is often abused by the unscrupulous.
Accounting for Approval Sales.—This abuse creates the problem of a correct method of handling approval sales. The difficulty is rather one of organization and administration than of accounting procedure; the record-keeping presents no new difficulties and under certain conditions may be likened to the methods of recording outward consigned goods. In no sense are such transactions to be regarded as sales and handled in the regular sales records, thereby showing a profit not yet earned. The correct method, both from an accounting and a legal viewpoint, is to keep a memorandum record of approval sales similar to that made for consignments.
Unlike consignments, however, the price shown in the invoice is the actual selling price of the goods, and the sale if consummated is treated as a regular sale, no effort being made to keep the profit or loss on approval sales separate from the profit on regular sale transactions.
In the retail trade the prevailing practice in handling approval sales is to enter the charge to the customer’s account when the goods are sent out and to credit the account for all returns. In this way the books keep record of all goods out on approval and provide an adequate check against lost or misplaced goods.
When transactions of this kind are large in number, subsidiary books devoted exclusively to their record may be kept.
Tickler File Method of Handling Approval Sales.—Approval sales transactions must usually be completed within a comparatively short space of time, either by acceptance or by return of the goods, and in such cases a shorter method of recording them is followed. The sales tickets or invoices covering approval sales are made with some kind of a distinctive mark—color of paper, title, etc.—to allow their easy separation from the regular sales tickets. These tickets are kept in a temporary tickler file in the order of the expiration dates of the approval period. If the sale is consummated, the ticket bearing a stamp to that effect is sent through for record as a regular cash or credit sale. If the goods are returned, the ticket may be filed as a part of that particular customer’s record; in this way a cumulative record is secured which would in some cases give an interesting commentary on human nature. If the customer is one who makes it his or her practice to buy on approval to secure the free use of nice wares for an evening or for some social function, the record would show it. A rigorous and unrelenting collection and follow-up system, supplemented by a full credit and information record, is the only safeguard against unscrupulous customers and oftentimes even this proves inadequate.
At inventory time all goods out on approval as shown by the approval sales file must be included in the inventory at inventory price, for the goods are still owned by the firm. As stated above, they must never be treated as sales.
The Bill and Charge System.—By this name is known the method of writing up the customer’s bill and using it as the basis for the charge to his account. The system is operated somewhat as follows: The duplicate sales tickets go to the auditing department, where they are first sorted by departments to secure the departmental analysis of the sales, and then re-sorted according to customers. Thus, if a customer has made purchases in more than one department, the tickets covering all his purchases are brought together. Each customer’s monthly bill or statement of account is started at the beginning of the month on a folded billhead perforated at the fold, the duplicate or under portion usually being somewhat wider, with loose-leaf binder punchings. On these bill and duplicate blanks the charges for the day are entered from the sorted sales tickets. This work is usually done on a billing machine with carbon roll or with carbon paper insertion.
At the end of the day the total amount of the charges entered on all monthly statements is either found by means of an adding machine or is indicated by the “tally strip” of the billing machine. This total must of course be equal to the aggregate amount of all sales tickets for that day, thereby proving the work of the billing clerks.
Customers’ bills after entry each day may either be passed on to the bookkeepers who charge each customer’s account with the day’s total purchases as shown by the bill, or the bills are returned to the file until used again for subsequent purchases. In such case the bookkeeper enters the total monthly charge to the customer’s account, only once a month.
Returned goods and allowances are also entered on these customers’ bills, but in a separate column or on another portion of the sheet.
The total charges entered on these statements must check against the total credit sales for the month, thus proving the additions of the bills.
At the end of the month the bill is torn from its duplicate and is passed to the bookkeepers. They enter the previous month’s balance, if there is one, and the current payments on account, and extend the amount now due. After the bills or statements have been mailed to the customers, the duplicate bills are filed away, being virtually the detail of the ledger account, for use in case of dispute.
This method of handling credit sales provides a ready means of getting the bills out on time, of assuring agreement between the ledger accounts and the bills, of freeing the ledger accounts of unnecessary detail, and of checking the total billings against the total sales tickets.
Salesmen’s Commissions and Efficiency Records.—Salesmen are often paid a commission in addition to salaries. Where the commission is based on the amount of sales, the sales ticket is made use of as the source of information for computing the commissions earned. To this end the tickets are sorted according to salesmen, and a record sheet, either separate or as an adjunct to the sales journal sheets, is filled in with each salesman’s total sales for the day. These totals should prove against the salesman’s record in the back of his book of sales tickets. At the end of the month his total sales are shown by his record sheet and his commission is determined therefrom. Of course, the total for all salesmen as shown by these sheets must equal the total sales for the period.
If the commission, often known as “spifs” or “P. M.’s,” is allowed only on certain classes of sales in order to encourage the movement of old stock, each sales ticket should indicate the amount of premium or commission due, so that a record can be made without the necessity of depending on the records of the individual salesmen.
Salesmen’s records besides being used for the particular purpose of computing commission, or bonuses due them, serve a wider object in that they contain fairly complete and reliable data in regard to the value and efficiency of individual salesmen. For this reason such records should be kept at all times, no matter whether a commission or bonus system is operated or not. Whenever an increase in a salesman’s salary is considered or when the sales force is to be decreased in number, these efficiency records are a valuable aid in making the right decision.