Sale of Goods on Approval or Return Basis

Goods sent Casually

Usually, when the goods are sold to the customer, they are immediately treated as sales and the revenue is recognized. However, when the goods are sold on approval or return basis the accounting treatment is different. The sale is recorded only when the goods are approved by the buyer. We will here discuss the treatment for Goods sent casually.

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Goods Sent Casually

When the goods are sent casually i.e. when there are a few transactions, the goods sent on approval or return basis are treated as ordinary sales by the seller. If within the specified time limit the goods are accepted or are not returned then no entry needs to be passed. We will treat them as sold for which we have already passed an entry before. If the goods are rejected or returned or no intimation is received within the specified time limit, the entry to reverse the sales is passed.

                                                   Learn more about Goods sent numerously here in detail. 

However, if the goods are still lying with the buyer or the receiver of goods at the end of the accounting year and the specified time limit is set to expire, they are treated as closing stock. Thus, the entry for sales made earlier is cancelled and they are recorded at cost price. However, when the goods are returned by the customer after the specified time limit no entry is passed.

Goods sent Casually

Journal Entries for Goods sent Casually

Date Particulars   Amount Amount 
1. For goods sent on Approval or Return basis Debtors A/c / Customer’s A/c Dr.  xx
To Sales A/c  xx
(Being goods sent on return or approval basis recorded at Invoice Price)
2. For goods accepted at invoice price No Entry
3. When goods are accepted at a price higher than invoice price Debtors A/c / Customer’s A/c Dr.  xx
To Sales A/c  xx
(Being difference in sale price recorded)
4. When goods are accepted at a price lower than invoice price Sales A/c Dr.  xx
To Debtors A/c / Customer’s A/c  xx
(Being difference in sale price recorded)
5. For goods rejected or returned within the specified time limit Sales A/c/ Sales Return A/c Dr.  xx
To Debtors A/c / Customer’s A/c  xx
(Being goods recorded as sales now reversed)
6. When the specified time limit is yet to expire and goods are lying with the customers, at the year-end Sales A/c Dr.  xx
To Debtors A/c / Customer’s A/c  xx
(Being entry for sales made earlier reversed at invoice price)
7. For treating the goods sent on approval or return basis as closing stock Goods sent on Approval or Return basis A/c Dr.  xx
To Trading A/c  xx
(Being goods sent on approval or return basis recorded as closing stock at cost or market price, whichever is lower)

      Click here to learn Goods sent frequently

Solved Example For You

Q: GE Electronics sends goods on sale on approval or return basis to its customers. The following are the transactions for 2017:

Jan. 31       Sent goods to A on sale on approval or return basis at cost plus 25%   ₹100000

Feb 25       Goods approved by the customer                                                            ₹ 30000

Mar 5        Goods returned by the customer                                                              ₹20000

Mar 31       Goods lying with the customer for approval                                           ₹50000

Pass the necessary journal entries for the year ending 31st March 2017.

Ans: In the books of GE Electronics

Date Particulars   Amount (Dr.) Amount (Cr.)
         
31 Jan A’s A/c Dr. 100000
To Sales A/c 100000
(Being goods sent on return or approval basis recorded at Invoice Price)
5 Mar Sales Return A/c Dr. 20000
To A’s A/c 20000
(Being goods recorded as sales now reversed)
31 Mar Sales A/c Dr. 50000
To A’s A/c 50000
(Being entry for sales made earlier reversed at invoice price)
31 Mar Goods sent on Approval or Return basis A/c Dr. 40000
To Trading A/c 40000
(Being goods sent on approval or return basis recorded as closing stock at cost price)

Calculation of cost price of goods = (50000 x 100)/ 125 = 40000

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