The goods when they are sold to the customer, they are immediately treated as sales and the revenue is recognized therein. However, when the goods are sold on approval basis or return basis, then the accounting treatment will be different. The sale is then recorded only when the goods are approved by the buyer, these are the goods which are sent casually. Now we will discuss the treatment for Goods that are sent casually in our prevailing section. We will know the details about the concept vividly.
Understanding the Concept
The goods when are sent casually, include a few transactions, the goods that are sent on approval or on return basis are treated as ordinary sales by the side of the seller. In a specified time limit the goods are required to be accepted and if they are not returned then no entry will be passed in that regard. We will treat the goods as sold for which the entry is being passed before. While, if the goods are being rejected or returned or no intimation is received within the specified time limit, then the entry to reverse the sales is required to be passed.
Apart from this, if the goods are still lying with the buyer or the receiver of the goods at the end of the accounting year and the specified time limit is set to expire, then they are treated as closing stock. The entry for sales that are made earlier is cancelled and then they are recorded at the cost price. When the goods are returned by the customer after a specified time limit then no entry is passed.
Treatment for Goods Sent Casually
The journal entries for the goods that are sent casually are required to be entered to facilitate the company in a process which will be useful to them. The basic journal entries used for the recording purpose are as follows:
1. The Goods Sent on Approval
Debtors A/C………. Dr
To Sales A/C
(bring goods that are sent on approval)
2. Goods When Accepted at the Invoice Price.
No entry.
3. When Goods are Accepted at a Price Which is Higher than the Invoice Price
Debtors A/C………… Dr
To Sales A/C
(The difference of the sale price is recorded)
4. When Goods are Accepted at a Price Which is Lower than the Invoice Price
Sales A/C……… Dr
To Debtors A/C
(The difference in the sale price recorded)
5. Goods Which are Rejected or Returned Within the Specified Time Limit
Sales A/C………. Dr
To Debtors A/C
(Goods which are recorded as sales is now reversed)
6. The Specified Time Limit is Yet to Expire and the Goods are Lying with the Customers on Year End
Sales A/C………. Dr
To Debtors A/C
(Entry of sales made earlier and reversed at the invoice price)
7. The Goods Sent on Approval or on Return Basis as the Closing Stock
Goods sent on Approval A/C…. Dr
To Trading A/C
(Goods are sent on approval and are recorded as closing stock at cost or at market price whichever is lower)
Goods Sent on Approval Basis before (GST)
Goods Sent on Approval Basis Returned within 6 months from the GST being implemented
The goods being sent on approval for a maximum six months before the appointed day are rejected and returned to the seller on or after the 1st July then nil tax will be payable. The goods should be returned within these six months from the appointed day
The period of 6 months is to be extended for a maximum of 2 months if only there is sufficient cause.
If the Goods Are Returned after 6 months
GST is to be paid by the person who is returning the goods, meaning the buyer after 6 months if those goods are liable to tax under the GST Act
The seller is required to pay GST on the goods returned after the 6 months.
FAQs on Goods Sent Casually: Accounting Treatment
1. What is meant by 'goods sent casually' or on an 'approval basis' in accounting?
Goods sent on an 'approval' or 'sale or return' basis refers to a transaction where goods are delivered to a customer with the option to either purchase them or return them within a specified period. From an accounting perspective, it is not considered a sale until the customer gives their approval, the return period expires, or they perform an act that implies acceptance. Ownership and risk remain with the seller until acceptance.
2. What is the most common journal entry for sending goods on an approval basis?
When goods are sent on approval, a business might treat it as an ordinary sale to simplify bookkeeping, especially if such transactions are frequent. The initial journal entry passed is:
Debtors A/c Dr.
To Sales A/c
(Being goods sent to customer on sale or return basis)
This entry is provisional and will be reversed at the end of the accounting period if the goods are not yet approved.
3. How are goods sent on approval treated in the Final Accounts if they are still with the customer at year-end?
If goods sent on approval are still awaiting acceptance at the end of the financial year, two adjustment entries are required to ensure correct financial reporting:
- For cancellation of the original sale entry: The initial sales entry is reversed to remove the unearned revenue.
Sales A/c Dr.
To Debtors A/c - For including the goods in closing stock: The goods legally belong to the seller, so they must be included in the closing inventory at their cost price.
Stock with Customers (on Sale or Return) A/c Dr.
To Trading A/c
4. What are the different accounting methods for recording goods sent on sale or return?
There are three primary methods to account for goods sent on a sale or return basis, depending on the volume of such transactions:
- When transactions are few: They are treated as ordinary sales, and adjustment entries are made for unapproved goods at year-end.
- When transactions are frequent: A separate set of books, called the 'Sale or Return Day Book' and 'Sale or Return Ledger', are maintained to track these goods separately from regular sales.
- When transactions are numerous: A memorandum 'Sale or Return Journal' is used. No entry is passed in the main books until the sale is confirmed.
5. Why is it crucial to reverse the initial sale entry for unapproved goods at the end of the accounting year?
Reversing the sale entry for unapproved goods is crucial for adhering to fundamental accounting principles. According to the Revenue Recognition Principle, revenue should only be recognised when it is earned, which in this case is upon the customer's approval. Treating an unapproved transaction as a final sale would overstate both Revenue and Debtors, leading to an inaccurate and misleading representation of the company's financial performance and position. It also violates the Matching Principle by not matching the cost of those goods with the period in which the revenue is actually recognised.
6. How does the accounting for 'goods sent on approval' differ from a normal 'credit sale'?
The key difference lies in the transfer of ownership and risk. In a normal credit sale, ownership and risk transfer to the buyer immediately upon the sale, and the transaction is recorded as final. For goods sent on approval, ownership and risk remain with the seller until the buyer formally or implicitly accepts the goods. Therefore, it's a conditional sale, whereas a credit sale is an absolute sale.
7. Provide an example of the accounting treatment when goods sent on approval are finally accepted by the customer.
Imagine a business sends goods costing ₹4,000 to a customer on an approval basis for an invoice price of ₹5,000. The business initially records this as a normal sale:
Debtors A/c Dr. ₹5,000
To Sales A/c ₹5,000
When the customer informs the business that they are keeping the goods, this entry becomes permanent. No further accounting entry is required because the sale has been correctly recorded. The transaction is now complete.
8. What is the accounting implication if goods are sent on approval at an invoice price (cost + profit)?
When goods are sent at an invoice price (a practice called 'loading'), the accounting treatment is the same upon sale. However, if the goods are unapproved at year-end, the adjustments are more complex. When including these goods in closing stock, they must be valued at their original cost, not the higher invoice price. The profit element, or 'loading', included in the invoice price must be reversed from the 'Stock with Customers' account to ensure the inventory is not overvalued in the balance sheet.
9. How does the accounting for goods sent on approval differ from goods distributed as free samples?
These two transactions have entirely different purposes and accounting treatments.
- Goods Sent on Approval are a potential sale. The goal is to generate revenue, and they are treated as part of the seller's inventory until accepted.
- Goods Distributed as Free Samples are a marketing expense. There is no expectation of revenue. Their cost is not part of sales or inventory but is transferred to an expense account, typically the Advertisement or Sales Promotion Account, by crediting the Purchases Account.
