Asok Nadhani-Accountancy-Sale on Approval

Sale on Approval

By Asok Nadhani

20.1 Sale on Approval

In some trade (like Books, fashion items) it is usual practice to sell the goods to the customers with the option to return within a specified time (or a reasonable time) if not accepted. It is not a sale, but simply transfer of possession of goods to customer. It becomes a transaction of sale only when the customer approves the goods or retains the goods beyond the specified time (or a reasonable time). This type of sale is known as “Sale on Approval” (SOR) or “Sale on Return” basis (SOA).

20.2 Accounting Procedure of Sale on Approval

There are three Accounting Procedure for recording transaction of sale on return or approval basis.

1.     Casual transaction or where transactions are occasional.

2.     Considerable number of transaction but not on regular basis.

3.     Large number of transactions on regular basis.

20.2.1 Casual or Occasional transactions

When goods are sold on return or approval basis occasionally, there is no need to have separate books of account for such transactions, and the following journal entry should be passed:

i)      On supply of goods.	Debtors A/c	Dr.
	To Sales A/c.
ii)     On receipts or acceptance of goods.	No accounting entry passed as the sale has been accounted for initially.
iii)    On return of goods.	Sales A/c	Dr.
	To Debtors A/c.
iv)    When the customer’s approval is still awaited at the end of the year.	(a)     Sales A/c	Dr.
	To Debtors A/c.
	(b)     Stock with Customers A/c	Dr.
	To Trading A/c. (Cost Price)

Example 1: A merchant casually sells goods on “Sale or Return Basis”. Just before the end of the financial year, goods costing Rs.10,000 were sent to Mr. X at 25% profit on cost. The merchant treated the transaction as credit sale at the time of dispatch of goods. How the transaction will be adjusted on 31^st December, 2009; if consent of Mr. X is pending? On this date, Stock in hand Rs.50,000 and Sundry Debtors stood Rs.1,00,000. Show the effect on Balance Sheet.

Solution:

	Calculation of sale value of goods
	Cost of goods		Rs.	10,000
	Add: Profit 25% of Rs.10,000		Rs.	2,500
			Rs.	12,500
Journal Entries
Date		Particulars					Dr. (Rs.)	Cr. (Rs.)
31.12.2009		Sales A/c				Dr.	12,500
		To Mr. X A/c.						12,500
		(The cancellation of entry for sale made on dispatch of goods on approval basis)
		Stock with Customers A/c				Dr.	10,000
		To Trading A/c.						10,000
		(Cost of goods on approval recorded as stock)

Balance Sheet (Extracts) as on 31.12.2009

Liabilities	Assets	Rs.	Rs.
	Sundry Debtors	1,00,000
	Less: Debtors on approval	12,500	87,500
	Stock in hand	50,000
	Add: Stock on approval	10,000	60,000

20.2.2 Considerable transaction (but not large)

Under such circumstances, a separate book called “Sales or return day book”, is used where a memorandum record is maintained. It is divided into 4 parts. This specimen is as follows–

Sale or Return Book

Goods sent on Approval			Goods Approved			Goods Returned			Balance
Date	Particulars	Amt.	Date	Particulars	Amt.	Date	Particulars	Amt.	Particulars	Amt.

a.     When goods are sold on approval basis- It is recorded in the 1^st column but no entry is made in the main books.

b.    When goods are approved by customers- It is recorded in the 2^nd column as sale entry.

Debtors A/c	Dr.
To Sales A/c.

c.     If goods sent under approval are retuned by customers- It is recorded in the 3^rd column but no entry is made in the main books.

d.    If stock lying with the customer pending approval- It is recorded in the 4^th column, and entry is made in the books for adjustment of stock with customer at cost price.

Goods with Debtors A/c	Dr.
To Trading A/c. (Cost Price)

Example 2:

A Ltd. send out goods on ‘Sale or Return’ basis and maintains a separate book to record such transaction. During the month of December, 2009, they sent out goods on ‘Sale or Return’ as follows. Show the day book:

2009			2009
April.		Rs.	April.
3	C & Co. Ltd.	15,000	8	Returned
17	D & Co. Ltd.	20,000	21	Approved
21	C & Co. Ltd.	21,000	26	Returned
29	C & Co. Ltd.	25,000	No intimation received as to approval and goods not yet returned.

 (I.C.W.A, Adapted)

Solution:

Books of A Ltd.

Sale or Return Day Book

Goods sent on Approval			Goods Approved			Goods Returned			Balance
Date	Particulars	Amt.	Date	Particulars	Amt.	Date	Particulars	Amt.	Particulars	Amt.
2009			2009			2009
April			April			April
3	C & Co. Ltd.	15,000	21	D & Co. Ltd.	20,000	8	C & Co. Ltd.	15,000
17	D & Co. Ltd.	20,000				26	C & Co. Ltd.	21,000
21	C & Co. Ltd.	21,000							C & Co. Ltd.	25,000
29	C & Co. Ltd.	25,000
		81,000			20,000			36,000		25,000

20.2.3 Regular transactions on sales or return basis

 When the transactions for sale of goods are regular, following set of books are maintained:

i)      Sale on Approval Day Book.

ii)     Approval Returns Day Book.

iii)    Sale on Approval Ledger (also known Sale on Approval Register).

Sale on Approval day Book

Date	Invoice No.	Name of Customers	L.F.	Amount (1)

 This Book is just as the Sales Book. When the sale of goods is on approval basis, they are recorded in this book. This figure is posted in Deliveries Column (Col. 1) of sale Ledger of the customer.

Sale on Approval Returned Day Book

Date	Name of Customers	L.F.	Returned (Rs.) (2)	Retained (Rs.) (3)

The goods which are retained and returned by the customers out of the goods sent on approval basis are recorded in this book. An Accounting record of sale is made in the books for the value of goods retained (Col. 3)

Sale on Approval Ledger

Deliveries (1)			Returns (2)			Sales (3)			Balance (4)
Date	Particulars	Amt.	Date	Particulars	Amt.	Date	Particulars	Amt.	Date	Amt.
No entry in financial Books.			No entry in financial Books.			To be recorded as sales			To be treated as Stock.

An entry for Balance Sheet lying with customer is adjusted in Stock-in-Hand.

The Particulars of Goods return (Col. 2) is posted in Returns Column (Col. 2) of Sale on Approval Ledger of the customers.

The Particulars of Goods Retained (Col. 3) is posted in Sale Col. (Col. 3) of Sale on Approval Ledger and an Accounting entry of sale is recorded for this Amount.

Example 3:

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

Date of Dispatch	Party’s Name	Amount	Remarks
10.12.2002	ABC Co.	10,000	No information till 31.12.2002
12.12.2002	DEF Co.	15,000	Returned on 16.12.2002
15.12.2002	GHI Co.	12,000	Goods worth Rs.2,000 Returned on 20.12.2002
20.12.202	Def Co.	16,000	Goods Retained on 24.12.2002
25.12.2002	ABC Co.	11,000	Goods Retained on 28.12.2002
30.12.2002	GHI Co.	13,000	No information till 31.12.2002

Goods are to be returned within 15 days from the date of dispatch, failing which it will be treated as sales. The books of ‘x’ are closed on the 31^st December, 2002.

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.

(CA- PE- I, 2003 – May)

Solution:

In the Books of ‘X’

Goods on Sales or Return, Sold and Returned day Book.

Date (2002)	Party to whom goods sent	L.F.	Amount (Rs.)	Date (2002)	Sold (Rs.)	Returned (Rs.)
Dec. 10	M/s ABC Co.		10,000	Dec, 25	10,000	-
Dec. 12	M/s DEF Co.		15,000	Dec, 16	-	15,000
Dec. 15	M/s GHI Co.		12,000	Dec, 20	10,000	2,000
Dec. 20	M/s DEF Co.		16,000	Dec, 24	16,000	-
Dec. 25	M/s ABC Co.		11,000	Dec, 28	11,000	-
Dec. 30	M/s GHI Co.		13,000	-	-	-
			77,000		47,000	17,000

Goods o Sales or Return Total Account

Date (2002)	Particulars	Amount (Rs.)	Date (2002)	Particulars	Amount (Rs.)
	To Returns	17,000	Dec. 31	By Goods sent on sales or Return	77,000
	To Sales	47,000
	To Balance c/d	13,000
		77,000			77,000