Dealing with Special Sales Transactions
Some sales transactions involve more than just a debit to cash or accounts receivable and a credit to sales (and maybe sales tax payable). These special transactions are handled a little differently than the standard fare. Examples include sales that involve discounts, time sales (such as layaway plans), and retainers (common with service providers).
The basics of these transactions are the same old thing; they simply involve an extra line or two in the journal and little extra posting. If these types of transactions are commonplace for your company, you can add dedicated columns to your sales journal to cut down on entry writeup.
Many businesses offer discounts to their customers, usually to increase sales and speed up customer payments. Some very common sales discounts include:
Early payment (for credit customers)
Special customer incentives (such as buy one, get one free)
Regardless of the reason, though, sales discounts reduce your overall revenue. To keep track of sales discounts without losing track of your full sales, you record them in a separate contra account called sales discounts. Sometimes the discount will be recorded at the time of the sale (for instance, with coupons and incentives). Other times, it will be recorded when you get paid, since you won't know at the time of sale whether an early payment discount will apply.
Some companies let customers buy pricier products using a layaway plan. Basically, they give you a deposit in exchange for your holding a particular item for them. They continue to make payments, usually according to a set schedule, until they've paid the full price of the item (including any sales tax). At that point, the sale is considered final: they've paid in full, and you've turned over the merchandise.
To record these transactions, you need to have a special general ledger account. The account can be called something like “layaway sales.” However, this account won't go in the revenue section of your chart of accounts; instead, it goes in with the liabilities. That's because until the sale is complete, you owe the customer something. The entries until the time the sale is final will involve a debit to cash, and a credit to this layaway sales account. When the sale becomes final, you'll record a debit to cash and a debit to layaway sales (which together should equal the amount of the total sale), and a corresponding credit to your sales account.
Because time sales involve inventory, trying to figure out when to record the sale isn't a factor. Companies with inventory have to use the accrual method of accounting, and that means the sale counts as a sale only when it becomes final.
Many small service businesses, such as lawyers and contractors, use the retainer system. The client pays a lump sum up front to cover upcoming services provided by the company. As work is performed, the balance in the retainer goes down; when it hits an agreed-upon balance, the client replenishes it.
How you treat this transaction depends on which accounting method you use for your company. Using the accrual method, the retainer is initially booked to cash (debit) and a special account called unearned revenue (credit). The unearned revenue account is a liability account, because you legally owe your client either the service you promised or the money he paid. As you begin to provide the service, measured in whatever chunks you and the client have agreed upon, you begin to debit unearned revenue and credit sales. These chunks can be measured in portions of a project completed, milestones met, or straight time. Whatever measurement you use, no revenue is recorded until you actually provide some services.
Under the cash method, the entire retainer is taxable upon receipt; if you end up refunding any portion of it, you get an expense deduction at that time. However, you still have to keep track of the unused portion, for you owe your client the full amount of services he paid for or his money back.