CA Foundation  >  ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

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Introduction 

Sometimes goods are sent to Customs with an option either to accept the goods or to reject the goods within a stipulated time. This type of transactions is known as “Sale on Approval Basis” or “Sale on Return Basis”. The main purpose of this type of sale is to boost up sales although this facility usually goes to very few reliable customers.
It must be remembered that when goods are sold on approval basis it is nothing but a mere transfer of goods and not the ownership. Since the ownership is not transferred it cannot be called a sale. It will be treated as a sale only when the approval of customer is received about the goods.


Methods of Accounting

Three methods of accounting are usually followed for recording “sale on approval or return basis” transactions, viz.

(a) When there are only a few transactions

(b) When there are considerable number of transactions

(c) When there are many transactions.

 

(a) When there are only a Few Transactions 

ACCOUNTING TREATMENTS:

1. Where Sale or Return transactions are a few

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation
ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation
ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation


Illustration 30.

Mr. Haridas sends goods to his customers on sale or return basis. The following transactions took place during the month of April 2013 :

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

Assume that the accounts are closed on 31st March every year and Haridas records the above transactions as ordinary sales basis.

Solution:

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation
 ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

 

(b) When there are Considerable Number of Transactions 

Under the circumstances, the recording of transactions is not done as per above method. In this case, a separate Sales or Return Day Book is maintained. It is divided into four parts viz.,

(i) First column – for recording goods sent on approval

(ii) Second column – for recording goods which are sold

(iii) Third column – for recording goods which are returned, and

(iv) Fourth column – for recording balance of stock of goods

 

Illustration 31.

Mr. X sends out the following goods to his customers on sale or return basis in the month of April 2013. You are requested to prepare Sale of Return Day Book for the month of April 2013 for the following transactions assuming that the transactions are in considerable numbers.

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

 

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

 

Value of stock amounted to `1,900 and valuation should be made on the basis of cost price or market price whichever is lower.


(c) When there are many Transactions

This method is applicable where the number of transactions in a period is fairly large and numerous in character. Under this circumstances, the following three books are opened :

(i) Sale or return Day Book;

(ii) Sale or Return Journal; and

(iii) Sale or Return Ledger


(i) Sale or Return Day Book; Sale or Return Day Book records the transactions relating to goods sent on sale or return on approval basis where such transactions are accrued. This book can be compared with the subsidiary books, viz. Sale Day Book, Purchase Day Book, etc.
Format of Sale or Return Day Book is given below :

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation


(iii) Sale or Return Ledger:
Like ordinary sale, i.e., when sales are made, they are at first recorded in Sales Book and then personal account is debited and Sales Account is credited. In the same manner, transactions which are recorded in the Sale or Return Book, i.e., personal account are debited and Sale or Return account credited. Thus, a separate ledger viz., Sale or Return ledger is opened for recording the transactions of the parties to whom goods have been sent on Sale or Return Basis.

 

Illustration 32.
S Ltd. sells goods on Sale or Return basis. Customers having the choice of returning the goods within 9 months. During April 2012, the following are the details of the goods sent.

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

Within the stipulated time G and I returned the goods while H, J and K informed that they have accepted the goods. Show the following accounts in the books of the firm.
Sale on Approval Account and Customers for Sale on Approval Account as on 15th May 2013.
Solution:

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

ICAI Notes 7.4 - Sale of Goods on Approval or Return Basis - Notes - CA Foundation

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