CA – FOUNDATION: PRINCIPLES & PRACTICE OF ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER – 11

SALE OF GOODS ON RETURN OR APPROVAL BASIS

TABLE OF CONTENTS
I. Preliminary II. Accounting Treatment
III. Practical Problems

1. PRELIMINARY

According to the provisions of The Sale of Goods Act, 1930, a transaction is treated as a sale only on transfer of
a title or ownership rights in the property i.e. when significant risks and rewards relating to goods is
transferred by the seller to the buyer, physical delivery of goods is not necessary.

Seller may sell goods to the buyer with the option to return the goods, within stipulated time period i.e. with
‘Return Policy’, such sales is known as Sale of Goods on Return or Approval basis. Therefore, whenever good
are sent on approval basis, the following possibilities may occur –

POSSIBILITIES WHEN GOODS

SOLD ON RETURN BASIS

Customer convey Customer do not

his Decision convey his Decision

Customer Customer Period of Period of

accepts the rejects & Approval is Approval is
Goods returns goods expired Unexpired

ACTIONS REQUIRED: ACTIONS REQUIRED: ACTIONS REQUIRED: ACTIONS REQUIRED:

 Since goods are  Since goods are  Since the period of  Since the period of approval is
accepted, all rejected, it will be the approval is expired, unexpired, the customer still has
significant risks and seller’s stock. the customer cannot an option to return the goods.
rewards are  Should be reversed return the goods.  Such goods are owned by seller
transferred to buyer. from sales (if earlier  It will be considered but in possession of buyer.
 Therefore, it will be treated as sales) at SP. as Deemed Sale  Should be reversed from sales (if
treated as Sales i.e.  Include in CS at CP. known as “IMPLIED earlier treated as sales) at SP.
“EXPRESS ACCEPTANCE”.  Account as ‘Stock with Customer’
ACCEPTANCE”. at CP.

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

-: 137 :-
Follow CA CS Anshul Agrawal Sir on Unacademy, Facebook, Instagram and Twitter
To watch Unacademy’s special classes use Invitation code ‘ANSHUL’

2. ACCOUNTING TREATMENT

Accounting treatment of such transactions depends upon the volume of such transactions in an organization:
1. Occasional (i.e. Casual):
When goods are sent on approval, an immediate sale obviously does not take place. Only when the
customer signifies his intention to purchase the goods, it will be a transaction of sale. However when the
transactions are few, the seller treats them as a transaction of sale. If the goods are accepted, no separate
entry is then required to be passed. If however the goods are returned within a stipulated period, a
reverse entry is required to be passed to cancel the sale transaction.
If at the year end, goods are still lying with customers and stipulated time period is not yet expired, the
entry for sales made earlier is cancelled / provision is made for returnable goods and goods lying with
customers are valued at its cost price and are included in the stock for the preparation of financial
statements.
Accounting Entries:
Sr. Accounting Entries
Transaction Value
No. Passed
1. Goods sent on Approval Sales Value Customer's A/c …… Dr.
To Sales A/c
2. Goods accepted / retained by No entry
Customers
3. Goods returned by customers within Sales Value Sales A/c …… Dr.
stipulated period To Customer's A/c
4. Provision for goods lying with Sales Value Sales A/c …… Dr.
customers at year end To Provision for Returnable
Goods A/c
Or
Sales A/c. …… Dr.
To Customer's A/c.

5. Stock with customers at year end Cost or Market Value Stock with Customer's A/c …… Dr.
whichever is lower To Trading A/c
6. Reversal of provision for goods lying Sales value Provision for Returnable
with customers at the beginning of Goods A/c …… Dr.
next year To Sales A/c
Or
Customer's A/c. …… Dr.
To Sales A/c.
Note: Balance in 'Provision for Returnable Goods Account' is deducted from Sundry Debtors in the
Balance-Sheet.

2. Normal (i.e. Frequent):

When goods are sent on approval, ownership of goods does not pass to the buyer. Hence seller should
not record the transaction as sale. When goods are sent on approval basis normally, a Memorandum Day
Book called as "Goods on Sale or Return Register" or "Goods sent on Approval Register" is
maintained. A Memorandum ledger containing Customer's account may also be maintained.

-: 138 :-
 CA – FOUNDATION: PRINCIPLES & PRACTICE OF ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

Proforma of Goods on Sale or Return Register

Goods sent on approval Goods returned Goods approved Balance
Amount Amount Amount Amount
Date Particulars Date Particulars Date Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
1 2 3 4 5 6 7 8 9 10

Total Total Total

The following procedure is adopted in this case -
1. When goods are sent out on approval, entries are made in columns 1 to 3, by recording 'selling
price of goods sent' in amount column.
2. If the goods are returned, entries are made in columns 4 to 6, by recording 'selling price of goods
returned' in amount column.
3. If the goods are accepted by customers, entries are made in columns 7 to 9, by recording 'selling
price of goods accepted' in amount column. Entry is then passed in regular books to record a sale.
4. Value of goods sent out but not returned or accepted till the year end for which stipulated period is
not yet expired is extended in column 10. The total of this column will show value of goods lying
with customers at selling price.
5. Goods with customers are then valued at cost price and included in the stock for the preparation of
financial statements.

Accounting Entries
No. Book / Transaction Value Accounting Entry
A Memorandum Books - No Entry
B Regular Books
1. Goods accepted / retained by Sales Customer's A/c …… Dr.
customers Value To Sales A/c
2. Stock with customers at year end Stock with Customer's A/c ……
Cost Price Dr.
To Trading A/c

3. Voluminous (Numerous):
When goods are sent out on approval very commonly, control will have to be maintained by having
memorandum set of accounts. In this case a separate set of books of accounts are maintained.
Following primary books of accounts are maintained -
i. Goods sent on approval book
ii. Goods returned book
iii. Goods Retained / Sold Book
A ledger containing 'Customers' accounts' and 'Sale on Approval A/c.' is also maintained.

-: 139 :-
Follow CA CS Anshul Agrawal Sir on Unacademy, Facebook, Instagram and Twitter
To watch Unacademy’s special classes use Invitation code ‘ANSHUL’
Proforma of Goods Sent on Approval Book
Amount
Date Proforma Invoice No. Customer L.F.
(Rs.)

Dr. 

Total:

Cr.
Proforma of Goods Returned Book
Amount
Date Goods Inward Ref. Customer L.F.
(Rs.)

Cr. 

Total:

Dr.
Proforma of Goods Retained / Sold Book
Amount
Date Invoice No. Customer L.F.
(Rs.)

Cr. 

Total:

Dr.
Accounting Entries:
Entries in Memorandum set of Books:
No. Transaction Accounting Entry
1. Goods sent on approval basis - Customer’s A/c …… Dr.
To Sale on Approval A/c.
2. Goods returned within stipulated period - Sale on approval A/c …… Dr.
To Customer’s A/c.
3. Goods retained / Sold - Sale on approval A/c …… Dr.
To Customer’s A/c.
NOTE: The balance in Sale on Approval Account represents goods lying with customers pending on
approval at selling price.
Entries in regular books of account:
No. Transaction Value Accounting Entry
1. Sale of goods Sales Value Customers' A/c …… Dr.
To Sales A/c.
2. Stock with customers at year end Cost Price Stock with Customer's A/c …… Dr.
To Trading A/c

-: 140 :-
 CA – FOUNDATION: PRINCIPLES & PRACTICE OF ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

3. PRACTICAL PROBLEMS

Q1. Occasional Transactions REG. PAGE NO.

Mr. A, a trader, dispatched goods costing Rs. 16,000 to his customer Mr. B on sale or return basis after
charging a gross profit of 25% on cost. Mr. A had treated the transaction as credit sale at the time of
dispatch of the goods.
Pass Journal entries in the books of Mr. A, if:
i. the customer had approved the goods;
ii. the customer had rejected all the goods;
iii. the customer had retained half of the goods while rejecting the other half.

Q2. Occasional Transactions REG. PAGE NO.

A trader has credited certain items of sales “on approval” aggregating Rs. 10,000 to sales account. Of
these, goods to the value of Rs. 3,000 have been returned and taken into stock at cost of Rs. 1,500 though
the record of return was omitted in the accounts, and in respect of another parcel of Rs. 1,000 (sale price
being cost plus 100%) the period of approval did not expire on the closing date.
Show adjustment and correcting entries in the books of the trader.

Q3. Normal Transactions REG. PAGE NO.

A firm sends goods on sale or return basis, ‘Customer’ having the choice of returning the goods within a
fortnight. During March, 2018 the following are the details of the goods sent.
Date Customer Value (Rs.) Proforma Invoice No.
March 5 A 1,200 1,503
March 11 B 2,500 1,504
March 17 C 1,500 1,505
March 20 D 2,800 1,506
By the end of March, 2018 A had signified that he had accepted the goods, while C returned Rs. 1,000
worth of goods and retained the rest. Find the sale for March, 2018 and value of goods with customers as
on 31st March, 2018 assuming that goods are sold at a profit of 40% on cost.

Q4. Normal Transactions REG. PAGE NO.

‘X’ supplied goods on sale or return basis to customers, the particulars of which are as under:
Date of Dispatch Party’s Name Amount (Rs.) Remarks
10.03.2018 ABC Co. 10,000 No information till 31.03.2018
12.03.2018 DEF Co. 15,000 Returned on 16.03.2018
15.03.2018 GHI Co. 12,000 Goods worth Rs. 2,000
Returned on 20.03.2018
20.03.2018 DEF Co. 16,000 Goods Retained on 24.03.2018
25.03.2018 ABC Co. 11,000 Goods Retained on 28.03.2018
30.03.2018 GHI Co. 13,000 No information till 31.03.2018
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 31st March, 2018. GP Ratio being 25% of Cost Price.

-: 141 :-
Follow CA CS Anshul Agrawal Sir on Unacademy, Facebook, Instagram and Twitter
To watch Unacademy’s special classes use Invitation code ‘ANSHUL’
Prepare the following in the memorandum book of ‘X’
i. Goods on Sales or Return, Sold and Returned Day Books.
ii. Goods on Sales or Return Total Account.
iii. Customers Accounts.

Q5. Occasional Transactions REG. PAGE NO.

Caly Company sends out its gas containers to dealers on Sale on Return basis. All such transactions are
however, treated as actual sales and are passed through day book. Just before the end of financial year,
100 gas containers, which cost them Rs. 900 each have been sent to the dealer on ‘sale or return basis’
and have been debited to his account at Rs. 1,200 each. Out of this only 20 gas containers are sold at Rs.
1,500 each. You are required to pass necessary adjustment entries for the purpose of Profit and Loss
Account and Balance Sheet.

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

“Every single day we turn one page of our life,

Now it’s the actions of earlier day to decide as to what you’ve written on that page or its left blank.
Work Hard everyday to narrate your Success Story”.
- Anshul A. Agrawal

-: 142 :-