Understanding Sale or Return (or Sale on Approval) in Financial Accounting
In financial accounting, the concept of Sale or Return (or Sale on Approval) involves sending goods to parties with the option to approve, accept, purchase, or return them within a specified time. This system is commonly used for introducing new products, where ownership transfer occurs only upon acceptance of the goods. The accounting treatment for such transactions involves entries in the Sundry Debtors, Sales, Return Inward, and other relevant accounts.
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KHATRA ADIBASI MAHAVIDYALAYA E E- -Content Content Department : Commerce Session: 2017-2018 Semester- 2 (Honours) Subject : Financial Accounting Subject : Financial Accounting- -II ( BCOMH201 C Topic: Sale or Return (or Sale on Approval) Topic: Sale or Return (or Sale on Approval) Name of Teacher : Prof. Kalyan Name of Teacher : Prof. Kalyan Kanti II ( BCOMH201 C- -3 ) 3 ) Kanti Dutta Dutta
Definition Definition A seller may sometimes send goods to parties with an option to approve , A seller may sometimes send goods to parties with an option to approve , accept and purchase such goods or to return the goods within a specified time accept and purchase such goods or to return the goods within a specified time limit. Usually, a manufacturer or a wholesaler does so with the retailers or limit. Usually, a manufacturer or a wholesaler does so with the retailers or prospective buyers for introducing add popularizing a new product. The buyer or prospective buyers for introducing add popularizing a new product. The buyer or the party to whom the goods are sent may accept such woods as purchased or the party to whom the goods are sent may accept such woods as purchased or return those. So the possession of goods changes when the goods are sent. But return those. So the possession of goods changes when the goods are sent. But the transfer of the ownership changes only if the goods are accepted. This the transfer of the ownership changes only if the goods are accepted. This system he s known as sale or return and the goods send are known as goods on system he s known as sale or return and the goods send are known as goods on Approval. Approval.
1Accounting Treatment where sale or Return Accounting Treatment where sale or Return transactions are few transactions are few For For goods goods sent Sundry Sundry debtors To To sales sales A/c For For goods goods return Return Return Inward To To Sundru Sundru debtors If If the the customers customers accepts a) a) At At invoice invoice price b) b) At At a a price price hogher Sundry Sundry debtors To To Sales Sales A/c C) C) At At a a price Sales Sales A/c To To Sundry Sundry Debtors At At year year ending ending , , for not not expired expired: : Sales Sales A/c A/c To To Debtors Debtors Suspense For For including including such such unconfirmed Stock Stock on on sale sale or To To Trading Trading A/c sent for debtors A/c A/c return within Inward A/c debtors A/c accepts the price- - No hogher than for approval approval: : A/c Dr Dr. . within specified specified time A/c dr dr. . A/c the goods No entry entry is than IP IP time limit limit: : goods (and is required required (and do do not not return) return): : debtors A/c A/c price lower A/c Dr Dr. . Debtors A/c for goods goods yet A/c . .Dr Dr. . lower than than the the IP IP A/c yet to to be be confirmed confirmed and and for for which which the the specified specified time time limit limit has has Dr Dr. . Suspense A/c unconfirmed goods or return return A/c A/c A/c goods with A/c Dr Dr. . with customers customers in in to to stock stock: :
Where Where Sale many many Sale or or Return Return transactions transactions are are more more or or less less regular regular and and are are too too : : A A Sale Sale or or Return Return Day Day Book Book is is maintained maintained as as usual usual. . A) A) Where Where sale a) a) A A separate separate set b) b) Goods Goods sent c) c) When When a a customer Sale Sale or To To Particular The The entry At At the the same Customer s Customer s A/c To To sale sale A/c a) a) For For goods goods return Now, Now, a) a) The The balance balance of whose whose time time limit as as stock stock on or Return Return transactions transactions are set of of books books should should be sent for for approval approval should customer approves approves any or return return total total A/c Particular Customer Customer A/c entry made made under under (b) sale or are too be maintained maintained for should be be recorded recorded in any goods goods: : A/c Dr Dr. . A/c (b) above above is is thereby too many many: : for recording recording these in the the Sale Sale or these transactions transactions. . or return return Day Day Book Book ai ai IP IP. . thereby cancelled cancelled. . same time A/c A/c return the time : : Dr Dr. . the first first part part of of process process (c) (c) is is done done . . of thesale thesale or limit is is yet on sale sale or or return or return return Total yet to to expire expire. . The return. . Total Account Account at The corres corres ponding at the the year ponding Cost year ending ending show Cost Price Price of show the of these these goods the IP goods should IP of of unapproved unapproved goods should be be considered considered goods
Illustration Illustration Prob.: Prob.: While preparing the final accounts of a company it is found that the While preparing the final accounts of a company it is found that the amount of its debtors, 500000 included 80,000 worth of goods sent out on amount of its debtors, 500000 included 80,000 worth of goods sent out on approval and debited to customers accounts in y respect of which the time for approval and debited to customers accounts in y respect of which the time for returning the goods had not yet expired. The goods had been invoiced at 33 1/3 % returning the goods had not yet expired. The goods had been invoiced at 33 1/3 % above cost . Show the journal entries to be passed in preparing the final accounts above cost . Show the journal entries to be passed in preparing the final accounts and also state the adjustments to be made in the final accounts. and also state the adjustments to be made in the final accounts. Sol. : Sales A/c Dr. 80000 Sol. : Sales A/c Dr. 80000 To Debtors Suspense A/c 80000 To Debtors Suspense A/c 80000 Stock on sale or return a/c Dr. 60000 Stock on sale or return a/c Dr. 60000 To Trading A/c 60000 To Trading A/c 60000
