Sale of Goods on Approval or Return Basis in Accounting – CA Foundation, CPT notes, PDF

This article is about Sale of Goods on Approval or Return Basis in Accounting for CA foundation CPT students. we also provide PDF file at the end.

What we will study in this chapter: We will study what is sales on approval and how & when it is accounted.

Sale of Goods on Approval or Return Basis

In a competitive environment traders may send goods to interested customers on trial basis. If customers finds it suitable he will accept otherwise he will return the same within stipulated time. This is commonly referred to as ‘sales on approval’. Issue is when to recognize it as sales.

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15.1   MEANING:

15.1.1   Meaning of sale on approval:

♦    When goods are sent to the customer with clear understanding that he may accept it after test and trial or return it to the seller within the stipulated time, is known as sales on approval.

♦        He is under no obligation to accept/buy it.

15.1.2   Recognition as sale:

♦        Such transaction becomes sales when

(i)              customer conveys his acceptance or

(ii) the time allowed to him has expired and he has not returned the goods,

■ which ever occurs first.

15.2      ACCOUNTING ENTRY:

15.2.1   When goods are sent?

♦        No entry, because at that stage it is not a sale and there is no right to recover the amount from customer.

♦        It is neither an income nor a receivable.

♦        The goods are still the property of vendor (seller).

15.2.2   Entry if customer returns the goods:

♦    Because no entry is passed when goods were sent (see para 9.2.1), question does not arises for passing entry on its return.

♦        Hence no entry.

15.2.3   When and what entry will be passed?

♦    It will become a sale when either of the condition as mentioned in para 9.1.2 is fulfilled and at that time following entry will be passed

Customer (Debtor) a/c Dr. xxx

To Sales a/c                      xxx

15.2.4   What happens if neither of the condition is fulfilled by the end of accounting year?

♦        Entry for sale wifi not be passed because it is not yet sold, thus it is still our goods and

♦        hence should be included in inventory (closing stock) at cost or net realisable value whichever is lower.

Stock with customer/stock on approved a/c Dr. (an asset) xxx

To Trading a/c                                                             xxx

15.2.5    What if the party has a practice of passing entry of sale as soon as goods are sent (so as to not lose control (track) of goods)?

♦        Although in principle it is not correct.

♦    But as far as th e condition of sale has fulfilled before the end of accounting year, so far so good, no problem and nothing to be done.

♦    But if certain goods remain with customer at the end of the year, which has not become sale then the following reversal entry will have to be passed.

Sales a/c Dr.                                   xxx

To Debtors (customer) a/c          xxx

♦        And further such goods should be included in closing inventory as explained in para 9.2.4

Exactly same will be the position of buyer of such goods. He should recognize as purchase and include in inventory only when those condition is fulfilled. Until then it is not his goods, even though physically these are lying with him.

15.3   MEMORANDUM RECORDS OF SALES ON APPROVAL:

♦        When such transactions are a regular feature of our business and account for a significant volume,

♦    then it is better to keep some memorandum records (it is not part of books of account) so as to have complete knowledge and control of goods lying with customers.

♦    A memorandum sales on approval register can be maintained as follows: These formats are not rigid and can be modified according to our need and convenience.

♦    Either only this register can be prepared or in addition from this register memorandum ledger accounts can also be prepared.

♦    All customers personal accounts and sales on approval accounts can be made (for entries please refer Illustration 15.7).

♦    Balance in this accounts at any point of time will show the total sales value of the goods lying unsold with customer and the customers with whom it is lying.

Procedure:

Step 1 – When goods are sent record details in columns 1 to 4 in above register and debit individual customers a/c. and credit sales on approval a/c. if memorandum ledger a/cs are maintained.

Step 2 -When goods are returned by customer record in columns 5 & 6 and debit sales on approval a/c. and credit customer a/c.

Step 3 – When it become sale ie. either acceptance is received or time allowed expired, record in columns 7 & 8. Debit sales on approval a/c. and credit customers a/c.

Then prepare sales invoice, record its number in column 9 for cross referencing and account it as sales in regular account books debiting customers a/c and crediting sale a/c. Then columns 10 & 11, closing balance will be nil.

Step 4 -Whatever goods remained unsold at the end of the year (ie. figure of column 10 which is 4 – 6 – 8). Ascertain cost of such goods and note in column 11 and pass adjustment entry for it as closing stock in regular account books.

ILLUSTRATIONS

Illustration 15.1: As at the end of the year sales includes goods sent on approval and lying unsold with customers Rs. 10,000. Goods are sold at a profit of 25% on cost.

Solution, (a) Sales on approval arc accounted as sales when customer accepts it or when the time allowed is expired. In above case neither of the event has happened, hence entry of sales is wrongly passed and will be rectified as follows –

Sales a/c Dr.               10,000

To Debtors a/c            10,000

(b) Because these goods are as yet unsold, hence are the property (asset) of the entity and should be included in closing stock at cost or net realisable value whichever is lower.

Sale value                   Rs. 10,000

Cost.  ×100 = Rs. 8,000

Hence add Rs. 8000 to value of closing stock and then pass adjustment entry for closing stock.

Goods are lying with customer. Hence when closing stock is ascertained by physical verification in our godown, the above goods does not get included and hence are to be added separately.

Illustration 15.2: If in above case it is stated that goods were included in closing stock.

Solution. Then action as per (a) above only will be required. Action as per point (b) above will not be required.

Illustration 15.3: If in above illustration it is stated that goods are sent on approval but not entered as sales and remained unsold as at year end.

Solution. Then action as per point (a) will not be required only action as per point (b) above will be required.

Illustration 15.4: A company sends goods on approval and records as sale only after it received confirmation from the party or on expiry of the time allowed for approval. As at year end goods invoiced at Rs.50,000 are lying with customer. For 60% of these goods confirmation was received/time was expired as at year end but could not be recorded as sales. Sales are made at 20% profit on sales value.

Solution. Pass entry for 60% ie. Rs. 30,000

Debtors a/c Dr. 30,000

To Sales a/c                       30,000

Balance 40% sales value being Rs. 20,000 are still unsold and hence should be included in closing stock at cost.

Sales value                     Rs. 20,000

Less: Profit 20%              Rs. 4,000

Cost                                 Rs. 16,000

Add Rs. 16000 to the value of closing stock and then pass adjustment entry of dosing stock.

Illustration 15.5 : On 1.12.2005 A sent some goods costing Rs. 3,500 at a profit of 25% on sales to B on ‘Sale or Return¹ basis. B returned goods costing Rs. 800. At the end of the accounting period ie. on 31.12.2005, the remaining goods were neither returned nor were approved by him. Show journal entries to give effect to the above transaction.

Solution.

On 1.12.2005      When goods were sent                               —no entry—

When part of goods were returned                                         — no entry—

On 31.12.2005 Reasonable time has elapsed and balance goods are not received back and hence the same should be treated as sale

B (Debtor) a/c Dr. 3600

Alternative – Sometimes to keep proper control of the goods sent an enterprise may like record it in accounts book itself. Then it can be done as follows:

On 1.12.2005              When goods were sent sale value 3500/75×100=4667

B (Debtor) a/c                         Dr.      4667

To Sales on approval a/c              4667

When goods are returned 800/75×100=1067

Sales on approval a/c             Dr.       1067

To B a/c                                        1067

On 31.12.2005            When balance goods are treated as sales

Sales on approval a/c Dr. 3600

To Sales a/c                       3600

In such cases the goods which remain unsold at the end of the year will have to be reversed as follows:

Sales on approval a/c Dr. xxx

To Party (Debtor)                                xxx

Cost of such goods will have to be included in closing stock.

Illustration 15.6: A merchant sends out his goods casually to his dealers on approval basis. All such transactions are, however recorded as actual sales and are passed through sales book. On 31.12.2005, it was found that 100 articles at a sale price of Rs.200 each sent on approval basis were recorded as actual sales at that price. The sale price was made at cost plus 25%. You are required to: (a) give adjustment entries (b) show how they will appear in final a/c.

Solution. The sales includes goods which remained unsold on 31.12.2005. Value = 100 × 200 = 20,000. The reversal entry will be

Sales a/c Dr.                            20,000

To Debtors a/c                                    20,000

In the final accounts sales and debtors will be after reducing this Rs. 20000/The cost of this goods Rs. 16000 (20000 = 25 × 100) will be accounted as closing stock.

Trading A/c (Extract)

Balance Sheet (Extract)

Illustration 15,7 : Ramesh sends goods on approval basis as follows:

Show how the transactions will be dealt with when memorandum books are kept on double entry system?

Solution

Memorandum Records

Goods on sale or return register

Entries:

(i)      When goods are sent on approval

Individual customer a/c Dr. 11,240

To Sales on approval a/c                       11,240

(ii)      When goods are returned

Sales on approval a/c Dr. 4,440

To Individual customer a/c                     4,440

{Hi) When the goods are accepted/time expired Sales on approval a/c Dr. 6800

To Individual customer a/c                     6800

Note: Now this is the actual sales hence it will be recorded in accounts books in the usual manner debiting individual customer account and crediting sales a/c.

(iv) Balance of goods at the end of the year

This will show the sales value of goods still lying unsold with customers. Cost of such goods will be included and accounted as stock in books of account.

Illustration 15.8 : ‘X’ supplied goods on sale or return basis to customers, the particulars of which are as under:

Goods are to be returned within 15 days from the date of despatch, failing which it will be treated as Sales. The books of ‘X’ are closed on the 31st December, 2005.

Prepare the following account in the book of ‘X’:

(i) Goods on Sales or Return, Sold and Returned Day Books.

(ii) Goods on Sales or Return Total Account.

Solution :

In the Books of ‘X’

Goods on Sales or Return, Sold and Returned Day Books

(ii)                                                         Goods on Sales or Return Total A/c

Note: (1) Entry for recording sales of Rs. 47,000/- will be passed in Accounts book debiting customers (debtors) a/c and crediting sales a/c. & Goods lying with customer sale value Rs.13,000 will be included in closing stock at cost.

(2) The above are memorandum records.

PRACTICE PROBLEMS

(Answers & Hints given at the end of the Chapter)

5. 1: A merchant sends out his goods on approval basis. All such transactions are, however recorded as sales when approval is received or the time expires. On 05.03.2014, he sent on approval basis 100 articles at a sale price of Rs. 200 each to be accepted or returned within a month. On 10.03.2014, 40 articles received back and on 25.03.2014 approval received for 50 articles. The sale price was made at cost plus 25%. You are required to pass entries up to the end of year on 31.03.2014.

P.2 : A merchant sends out his goods on approval basis. All such transactions are, however recorded as actual sales immediately. On 05.03.2014, he sent on approval basis 100 articles at a sale price of Rs. 200 each to be accepted or returned within a month. On 10.03.2014, 40 articles received back and on 25.03.2014 approval received for 50 articles. The sale price was made at cost plus 25%. You are required to pass entries up to the end of year on 31.03.2014.

P.3 : As at the end of the year sales includes goods sent on approval and lying unsold with customers Rs. 10,000. Goods are sold at a profit of 25% on sales. Show the adjustments to be made in final accounts.

P.4 : A company sends goods on approval and records as sale only after it received confirmation from the party or on expiry of the time allowed for approval. As at year end goods invoiced at Rs. 50,000 are lying with customer. For 60% of these goods confirmation was received/time was expired as at year end but could not be recorded as sales. Sales are made at 20% profit on sales value. Show the adjustments to be made in final accounts.

P.5 : Ramesh sends goods on approval basis as follows:

Show how the transactions will be dealt with when memorandum books are kept.

ANSWERS AND HINTS FOR

Practice Problems