Question

Methods of accounting treatment for goods sent on sale or return basis

Answer 1

Answer:

Businessman provides many facilities to his customers with a view to increase his sales. One of the facilities is that goods are delivered to the customers with the option to retain or return the same within a specified short period. When a businessman sends goods with such an option it is generally called “Sale or Return”.

When a businessman sends goods under “Sale or Return” basis to a cus­tomer, it cannot be treated as sales. Delivery of goods on approval basis implies a change of posses­sion only and not a transfer of ownership unless the specified period expires without return or the customer earlier informs of his approval.

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Till the expiry of period or approval from customers, trans­actions are not sale i.e. ownership vests with the businessman. Businessman earns profits only on absolute sale. Therefore, there is a need of a special accounting treatment.

The accounting method of goods sent on Sale or Approval basis is based upon the frequency of sales; and they are:

1. Transactions are very few.

2. Transactions are frequent.

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3. Transactions are numerous.

1. Transactions are Very Few:

When transactions are very few in number, no special accounting treatment is needed. And in such a case, the goods sent on approval basis can be treated as sales.

The relevant entries are:

Relevant Entries

The goods not approved or not rejected need some adjustment at the end of the accounting year. They are included in the stock either at cost price or market price whichever is less.

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Illustration 1:

In preparing the final account of a company it is found that the amount of sundry debtors Rs 2, 00,000 includes Rs 40,000 worth of goods sent out on approval and debited to customers’ accounts, in respect of which the time for returning the goods has not yet expired. These goods have been invoiced at 33 1/3% above the cost.