CHAPTER

21
1.0 pass to the buyer: (i) (ii) goods

Goods sent on Approval Or on Sale or Return Basis

MEANING OF GOODS SENT ON APPROVAL Goods sent on approval or on sale or return basis mean the delivery of the goods to the customers with the option to retain or return them within a specified period. According to Sec.24 of the Sale of Goods Act, 1983, in respect of such goods, the sale will take place or the property in the goods

When he signifies his approval or acceptance to the seller; When he does some act adopting the transaction; e.g. pledging such

(iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, on the expiry of the specified time (if a time has been fixed) or on the expiry of a reasonable time (if no time has been fixed). 2.0 METHODS OF ACCOUNTING FOR GOODS SENT ON APPROVAL There are three methods to account for goods sent on approval or on sale or return basis viz., Ordinary Sale Method, Multicolumn Journal Method and Separate Day Books Method. 3.0 ORDINARY SALE METHOD

3.1

When the transactions are few, the goods sent on approval or on sale or return basis are treated as an ordinary sale (although theoretically it is incorrect to describe as such).

3.2 3.3

If, at the year-end, goods are still lying with customers and the specified time has not yet expired, the original entry for sales is cancelled. Like an ordinary closing stock, such goods are considered as stock lying with customers on behalf of seller and are valued at cost or net realizable value whichever is lower.

3.4

Journal Entries The Journal entries which are passed under this method are given on next page. Journal Entries to be passed under Ordinary Sale Method

1. When goods are set on approval Sundry Debtors A/c or on sale or return basis To Sales A/c

Dr. (With Invoice Price)

2. When such goods are returned Sale Returns A/c Dr.(With Invoice Price) within the specified time To Sundry Debtors A/c 3. When the customers take the Sales A/c lower than the invoice price 4. At the year end (i) When such goods are still lying Sales A/c Dr.(With Invoice Price) with customers at year end and To Sundry Debtors A/c the specified time limit has not yet expired (ii) When such goods are brought into final accounts as closing stock at cost or net realizable value whichever is lower Stock with customers To Trading A/c Dr. (With Cost or Dr.(With Difference)

delivery of such goods at a price To Sundry Debtors A/c

(on Sale or Return basis) A/c NRV whichever is lower)

Tutorial Notes (i) (ii) Alternatively, Debtors Suspense Account may be credited in place of Sundry Debtors Account in Entry (d). In he beginning of next accounting period, entry (d) should be reversed. customers on a subsequent date in the next accounting period. ILLUSTRATION 1 Tulsian Ltd., sends out goods to customers on sale or return basis, customers have the option to retain or return the goods within a month. The following transactions took place during the months of Dec. 20x1 and Jan., 20x2. Date 05.12.20x1 Transactions Sent goods to the following customers on sale or return basis at 25% over and above cost price (being Rs.100). W 20 Units, X 10 Units, Y 32 units, Z 24 units. 10.12.20x1 Goods returned by W (iii) No entry is required to be passed when such goods are retained by the

15.12..20x1 Received letters of approval from X accepting the goods at Rs.115 each to which the seller agreed. 02.01.20x2 Goods returned by Z.

04.01.20x2

Received intimation of acceptance from Y

Tulsian Ltd., records sale or return transactions as ordinary sales. Give journal entries for the months of Dec., 20x1 and Jan., 20x2. Also show how these items will appear in the Balance Sheet as on 31 st Dec., 20x1 assuming that on 30 th Dec., 20x1, the Sundry Debtors Balance stood at Rs.1,00,000 and Stock in-hand amounted to Rs.60,000.

4.0 4.1

MULTICOLUMN JOURNAL METHOD Where a moderate number of articles are sent out on a sale or return basis, a Multicolumn Sale or Return Journal is maintained to record the deliveries returns, sales and the balance of such goods.

4.2 below:

A simple format of Multicolumn Sale or Return Journal is given

Format of Multicolumn Sale or Return Journal Sent on Approval 1 2 3 Dat e Particulars Multicolumn Sale or Return Journal Goods Returned Goods Approved 4 5 6 7 8 9 Particulars Amt. Dat e Particulars Balance 11

10

Amt. Dat e

Fol. Amt. Amt.

4.3

The procedure for recording the various details in the aforesaid Journal is summarized below:

(a) When the goods are delivered on sale Enter in Column 1 to 3 or return basis (b) When such goods are returned

Enter in Column 4 to 6

(c) When such goods are approved (or Enter in Column 7 to 10 retained) (d) Value of goods sent out but neither sold nor returned till the close of accounting period.

Enter in Column 11

4.4

Accounting for Goods approved or retained It may be noted that when such goods are approved (or retained), the individual amounts (entered in column 10) are then psted to the debit of respective customers Accounts and the periodic total (normally monthly) of column 10 is posted to the credit of Sales Account in the Ledger. Journal of Tulsian Ltd.

Date

Particulars Customers A/c To Sales A/c Dr.

L.F. Dr.(Rs) Cr.(Rs)

4.5

Accounting for Goods neither approved nor retained Like an ordinary stock, the goods sent out but neither sold nor returned till the close of accounting period are considered as stock lying with the customers on behalf of seller and are valued at Cost or Net Realizable Value whichever is lower. Such goods are brought1 into final accounts by passing the following adjusting entry: Stock with Customers (on Sale or Return basis) A/c To Trading A/c (With Cost or Net Realizable Value whichever is lower)

5.0 5.1

SEPARATE DAY BOOKS METHOD Whether a large number of articles are sent out on a sale or return basis, the following books are maintained: (a) Sale on Approval Day Book (b) Sale on Approval Inward Day Book (c) Sales on Approval Ledger (Like an ordinary Sales Day Book) (Like an ordinary Sales Inward Day Book)

5.2

Sale on Approval Day Book Sale on approval Day Book is used for the purposes of recording the deliveries of the goods sent out to the customers on a sale or return basis. A simple format of this book is shown below: Format of Sale on Approval Day Book Sale on Approval Day Book Date Invoice No. Name of Customer L.F. Rs.

Posting Procedure Individual amounts are posted to the respective Customers Accounts and the periodic total (normal monthly) is posted to the credit of Sale on Approval Total Account in the Sale on Approval Ledger. 5.3 Sale on Approval Inward Day Book Sale on Approval Inward Day Book is used for the purpose of recording the return or retention of such goods. A simple format of this book is shown below: Format of sale on Approval Inward Day Book Sale on Approval Day Book

Date

Proform a Credit

Name of Customer

L.F.

Returned Retained Rs. Rs.

Posting procedure Individual amounts are posted to the credit of respective Customers Accounts and the periodic total (normally monthly) is posted to the debit of Sale on Approval Total Account in the Sale on Approval Ledger. It may be noted that when such goods are retained by the customers and are treated as sales, such transaction is recorded in two Day Books viz., Sale on Approval Inward Day Book (to cancel the earlier entries and ordinary Sale Day Book (to record as an ordinary sale). 5.4 Sale on Approval Leger In Sale on Approval Leger, Sale on Approval Total account and Accounts of Individual Customers for Sale on Approval are opened. The formats of Sale on Approval Total Account and Individual Customer for Sale on Approval Account are given below: Format of Sale on Approval Total Account Sale on Approval Total account Dat e Particulars To Sundries as per Sale on Approval Inward Book -- Retuned -- Retained To Balance c/d 1. Periodic Total of Sale on Approval Day Book, 2. Periodic Total of Returned Column of Sale on Approval Inward Book, 3. Periodic Total of Retained Column of Sale on Approval Inward Book. Format of Customer for Sale on Approval account Xxx2 Xxx3 Xxx xxx xxx Folio Rs . Dat e Particulars By Sundries as per Sale on Approval Day Book Xxx Cr. Folio Rs.

Dat e

Particulars To Sale on Approval (Good sent) Total A/c

Folio Rs. Xxx1

Dat e

Particulars By Sale on Approval Total A/c --- Returned --- Retained By Balance c/d

Folio Rs.

Xxx2 Xxx3 Xxx xxx

xxx

1. Individual Amount of Sale an Approval Day Book, 2. Individual Amount of Returned column of Sale on Approval Inward Book, 3. Individual Amount of Retained Column of Sale on Approval Inward Book. 5.5 Treatment of Credit Balance of Sale on Approval Total Account It may be noted that the credit balance of the Sale on Approval Total Account must be equal to the sum of the debit balance of the Individual Customers Accounts. The credit balance of the Sale on Approval Total Account at the close of the accounting period represents the value of goods sent out but neither sold nor returned. Such goods are considered as stock lying with the customers on behalf of seller and are valued at Cost or Net Realizable Value whichever is lower. Such goods are brought into final accounts by passing the following adjusting entry:

Stock with Customers (on Sale or Return basis) A/c. To Trading A/c

Dr.

(With cost or Net Realisable Value whichever is lower)

ILLUSTRATION 2

X supplied goods on sale or return basis to customer, the particulars of which are as under: Date of Dispatch Partys Name Amount Rs. 10.12.20x3 12.12.20x2 1512.20x2 20.12.20x2 25.12.20x2 30.12.20x2 ABC Co. DEF Co. GHI Co. DEF Co. ABC Co. GHI Co. 10,000 15,000 12,000 16,000 11,000 13,000 Remarks No information till 31.12.20x2 Returned on 16.12.20x2 Goods worth Rs.2,000 Returned on 20.12.20x2 Goods Retained on 24.12.20x2 Goods Retained on 28.12.20x2 No information till 31.12.20x2

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, 20x2. Prepare the following account in the book of X. (i) (ii) Goods on Sales or Return, Sold and Returned Day Books. Goods on Sales or Return Total Account (CA (Foundation) May 2003) MULTIPLE CHOICE QUESTIONS Set 1 1. Under sales on return or approval basis, the ownership of goods is passed only. (a) when the retailer gives his approval (b) if the goods are not returned within specified period. (c) Both (a) and (b) (d) None of the above

2. Under sales on returned or approval basis, when transactions are few, the seller, while sending the goods, treats them as (a) an ordinary sale but no entry is passed in the books (b) an ordinary sale and entry for normal sale is passed in the books (c) Approval sale and no entry is passed

(d) None of these 3. Under Sales on Return or approval basis when the transactions are few and the seller sends the goods on approval or return basis, the accounting treatment will be(a) No Journal Entry (c) Entry in Sales or Return Day Book (b) Entry in Sales or Return Journal (d) Sundry Debtors A/c To Sales A/c Dr.

4. Under Sales or Return or approval basis when the transactions are moderate and the seller sends the goods on approval or return basis, the accounting treatment will be(a) No Journal Entry (c) Entry in Sales or Return Day Book (b) Entry in Sales or Return Journal (d) Sundry Debtors A/c To Sales A/c Dr.

5. Under Sales on Return or approval basis when the transaction are large and the seller sends the goods on approval or return basis, the accounting treatment will be(a) No Journal Entry (c) Entry in Sales or Return Day Book (b) Entry in Sales or Return Journal (d) Sundry Debtors A/c To Sales A/c Dr.

6. Under Sales on Return or approval basis when the transaction are few and the he customer accepts the goods, the accounting treatment will be(a) No Journal Entry (c) Entry in Sales or Return Day Book (b) Entry in Sales or Return Journal (d) Sundry Debtors A/c To Sales A/c Dr.