FUNDAMENTALS OF ACCOUNTING - CHAPTER 7

Solution In the books of Capital Electronics Journal Entries Date Particulars L.F. Dr. (in Rs.) Cr. (in Rs.) 2009 Sept. 15 Sunday Debtors A/c Dr. 1,00,000 To Sales A/c 1,00,000 (Being the goods sent to customers on sale or return basis ) Oct. 20 Return Inward A/c (Note 1) Dr. 40,000 To Sundry Debtors A/c 40,000 (Being the goods returned by customers to whom goods were sent on sale or return basis) Dec. 31 Sales A/c Dr. 20,000 To Sundry Debtors A/c 20,000 (Being the cancellation of original entry of sale in respect of goods on sale or return basis) Dec. 31 Stock with customers on Sale or Return A/c Dr. 15,000 To Trading A/c (Note 3) 15,000 (Being the adjustment for cost of goods lying with customers awaiting approval) Note: (1) Alternatively, Sales account can be debited in place of Return Inwards account. (2) No entry is required for receiving letter of approval from customer. Rs.20,000×100 (3) Cost of goods with customers = =Rs.15,000 133.33 Illustration 2 S. Ltd. sends out its goods to dealers on Sale or Return basis. All such transactions are, however, treated as actual sales and are passed through the Day Book. Just before the end of the accounting year on 31.12.2009, 200 such goods have been sent to a dealer at Rs. 250 each (cost Rs. 200 each) on sale or return and debited to his account. Of these goods, on 31.12.2009, 50 were returned and 70 were sold, for the other goods date of return has not yet expired. Pass necessary adjustment entries on 31.12.2009. FUNDAMENTALS OF ACCOUNTING 7.101 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS Solution In the books of S. Ltd. Journal Entries Dr. Cr. Date Particulars L.F. Rs. Rs. 2009 Dec. 31 Return Inwards A/c (Rs. 250 X 50) Dr. 12,500 To Sundry Debtors A/c 12,500 (Being the adjustment for 50 units of goods returned by customers to whom goods were sent on sale or return basis) Dec. 31 Sales A/c (Rs. 250 X 80) Dr. 20,000 To Sundry Debtors A/c 20,000 (Being the cancellation of original entry for sale in respect of 80 units of goods not yet returned or approved by customers) Dec. 31 Stock with Customers on Sale or Return A/c Dr. 16,000 To Trading A/c 16,000 (Being the cost of goods sent to customers on sale or return basis not yet approved, adjusted) Illustration 3 Caly Company sends out its gas containers to dealers on Sale or Return basis. All such transactions are, however, treated as actual sales and are passed through the Day Book. Just before the end of the 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. 7.102 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Solution In the books of Caly Company Journal Entries Dr. Cr. Date Particulars L.F. Rs. Rs. Sundry Debtors A/c Dr. 6,000 To Sales A/c 6,000 (Being the adjustment for excess price of 20 gas containers @ 300 each) Sales A/c Dr. 96,000 To Sundry Debtors A/c 96,000 (Being the cancellation of original entry for sale in respect of 80 gas containers @ Rs. 1,200 each) Stock with Customers on Sale or Return A/c Dr. 72,000 To Trading A/c 72,000 (Being the adjustment for cost of 80 gas container lying with customers awaiting approval) Illustration 4 E Ltd. sends out its accounting machines costing Rs. 200 each to their customers on Sales or Return basis. All such transactions are, however, treated like actual sales and are passed through the Day Book. Just before the end of the financial year, i.e., on December 24, 2009, 300 such accounting machines were sent out at an invoice price of Rs. 280 each, out of which only 90 accounting machines are accepted by the customers Rs. 250 each and as to the rest no report is forthcoming. Show the Journal Entries in the books of the company for the purpose of preparing Final Accounts for the year ended December 31, 2009. FUNDAMENTALS OF ACCOUNTING 7.103 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS Solution In the books of E Ltd. Journal Entries Dr. Cr. Date Particulars L.F. Rs. Rs. 2009 Dec. 31 Sales A/cs (Rs. 30x90) Dr. 2,700 To Sundry Debtors A/c 2,700 (Being the adj. for reduction in the selling price of 90 accounting machines @ Rs. 30 each) Dec. 31 Sales A/c (Rs. 280 x 210) Dr. 58,800 To Sundry Debtor A/c 58,800 (Being the cancellation of original entry for sale in respect of 210 accounting machines sent to customers not yet returned or approved) Stock with customers on Sale or Return A/c Dr. 42,000 To Trading A/c 42,000 (Being the cost of 210 accounting machines @ Rs. 200 each adjusted against Trading Account) Illustration 5 A sends out goods on approval to few customers and includes the same in the Sales Account. On 31.3.2009 the Sundry Debtors balance stood at Rs. 1,00,000 which included Rs. 7,000 goods sent on approval against which no intimation was received during the year. These goods were sent out at 25% over and above cost price and were sent to- Mr. X - Rs. 4,000 and Mr. Y -Rs. 3,000. Mr. X sent intimation of acceptance on 30th April and Mr. Y returned the goods on 10th April, 2009. Make the adjustment entries and show how these items will appear in the Balance Sheet on 31st March, 2009. Show also the entries to be made during April, 2009. Value of closing stock as on 31st March, 2009 was Rs. 60,000. 7.104 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Solution In the Books of A Journal Entries Dr. Cr. Date Particulars L.F. Rs. Rs. 2009 Sales A/c Dr. 7,000 March To Sundry Debtors A/c 7,000 31 (Being the cancellation of original entry for sale in respect of goods lying with customers awaiting approval) March Stock with Customers on Sale or Return A/c Dr 5,600 31 To Trading A/c (Note 1) 5,600 (Being the adjustment for cost of goods lying with customers awaiting approval) April 30 Sundry Debtors A/c Dr. 4,000 To Sales A/C 4,000 (Being goods costing Rs. 3,200 sent to Mr. X on sale or return basis has been accepted by him) Balance Sheet of A & Co. as on 31st March, 2009 (Extracts) Liabilities Rs. Assets Rs. Rs. Sundry debtors (Rs. 1,00,000 - Rs. 7,000) 93,000 Stock-in-trade 60,000 Add: Stock with customers on Sale or Return 5,600 65,600 1,58,600 Notes: (1) Cost of goods lying with customers = 100/125 x Rs. 7,000 = Rs. 5,600 (2) No entry is required on 10th April, 2009 for goods returned by Mr. T. Goods should be included physically in the stock-in-trade. 2.2 WHEN THE BUSINESS SENDS GOODS FREQUENTLY ON SALE OR RETURN BASIS When goods are sent out on sale, on approval or return basis, an immediate sale obviously does not take place. Only when the customer signifies his intention to purchase the goods or takes some action whereby it is indicated that he has decided to purchase the goods, the property in the goods passes to the buyer. So long as the property does not pass to the buyer, the seller should not record it as a sale and, therefore, should not debit the customer with the sales price. FUNDAMENTALS OF ACCOUNTING 7.105 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS Where a large number of articles are sent out on a sale or return basis, it is necessary to maintain a specially ruled Sale or Return Journal / Day Book: This Day Book is divided into 4 main columns - (1) Goods sent on Approval; (2) Goods Returned: (3) Goods Approved; and (4) Balance. Goods sent on approval Goods returned Goods approved Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 Date Particulars Fol. Amt. Date Particulars Fol. Amt. Date Particulars Fol. Amt. Amt. When such a Journal is kept the following procedure is adopted for recording transactions entered into on this basis. When goods are sent out for sale on approval, entries are made only in column 1 to 4, the sale price of goods being entered in column 4. The sale price is also posted to the debit of the customers' account in 'Goods on Approval Ledger', and periodically total of column 4 is posted to the credit of Goods on Approval Total Account in the same ledger. If goods are returned, entries are made in columns 5 to 8, the price of goods returned being entered to column 8. The individual amounts are credited to the Customers' Accounts, in the 'Goods on Approval' Ledger and the total of this column in periodically posted to the Total Goods on Approval Account. If the goods are retained by the customer, entries are made in columns 9 to 12. The individual amounts are then posted to the debit of customer's accounts in the Sales Ledger and their total is credited to Sales Account in the General Ledger. Further the customer's accounts in the Goods on Approval Ledger are credited with the individual amounts of goods sold and periodically, the total of the amount is posted to the debit of Goods on Approval Total Account. The value of goods sent out but not sold or returned till the close of the year is extended to column 13. The total of this column, afterwards, will show the value of goods with customers at the sale price. The balance amount is calculated as follows: Balance Value of Goods Sent on Sale or Return Less Value of Goods Returned Less Value of Goods Approved. Information relating to goods delivered and goods returned is kept on Memorandum basis. However, information relating to goods approved and balance is duly accounted for by passing journal entries relating to sales and stock on approval basis. (i) At the time of approval Customer's A/c Dr. To Sales A/c 7.106 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India The amount, after eliminating the element of profit, is included in the Trading Account representing the value of stock with customers at cost price. Like an ordinary closing stock, such goods are considered as stock lying with customers on behalf of seller and are valued at cost or net realisable value whichever is less. (ii) At the time of preparing of Final Accounts An adjustment entry is required for balance goods which is as follow: Goods with Customers on Sale or Return Account Dr. [Cost or net realisable value To Trading Account whichever is less] 2.3 WHEN THE BUSINESS SENDS GOODS NUMEROUSLY ON SALE OR RETURN When transactions are numerous, a business maintains the following books: (a) Sale or Return Day Book; and (b) Sale or Return Ledger. Ledger contains the accounts of the customers and the 'Sale or Return' Total account. It is important to remember that both are Memorandum Books. In this case, when the goods are sent to the customers on a sale or return basis, they are recorded in the Sale or Return day Book. Thereafter, in the Sale or Return Ledger, all the customers are individually debited and the Sale or Return Account is credited with the periodical total of the Sale or Return Day Book. When the goods are returned by the customers within the specified time, they are recorded initially in the Sale or Return Day Book. Thereafter, in the Sale or Return Ledger, the Sale or Return Account is debited with the periodical total of the Sale or Return Day Book and the individual customers are credited. The above mentioned records are all memorandum and hence cannot find a place in the regular books. When the business receives information about the acceptance of the goods or no intimation is received within the specified time, they are recognised as sales and are recorded in the Sales Day Book. Periodically, the total of the Sales Day Book is credited to Sales Account and debited to the Individual Customers Account. To cancel the earlier entries, individual customers are credited and the Sale or Return Account is debited. The entries for the approved goods are shown below: In the Memorandum Sale or Return Ledger In the regular General ledger Sale or Return Account Dr. Individual Customer's Account Dr. To Individual Customer's Account To Sales Account At the year end, in the Sale or return Ledger, the sum of the debit balances of the Individual Customers' Account must be equal to the credit balance of the Sale or return Account. It represents stock with customers waiting for approval at invoice price. To adjust the cost of such goods with customers in the Final Accounts, the following entry is passed: FUNDAMENTALS OF ACCOUNTING 7.107 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS Stock with Customers on Sale or Return Account Dr. [Cost or net realisable value, To Trading Account whichever is less] Illustration 6 A firm sends goods on sale or return basis. Customers having the choice of returning the goods within a month. During May 2009, the following are the details of goods sent: Date (May) 2 8 12 18 20 27 Customers P B Q D E R Value (Rs.) 15,000 20,000 28,000 3,000 1,000 26,000 Within the stipulated time, P and Q returned the goods and B, D, and E signified that they have accepted the goods. Show in the books of the firm, the Sale or Return Account and Customer- P for Sale or Return Account on 15th June, 2006. Solution Sale or Return Dr. Cr. Date Particulars Rs. Date Particulars Rs. 2009 2009 May 31 To Sundries: Sales 24,000 May 31 By Sundries June 15 To Sundries: Returned 43,000 (Goods sent on sale or return basis) 93,000 June 15 To Balance c/d 26,000 93,000 93,000 By Balance b/d 26,000 P's Account Dr. Cr. Date Particulars Rs. Date Particulars Rs. 2009 2009 May 2 To Sale or Return A/c 15,000 May ? By Sale or Return A/c 15,000 7.108 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 7 On 31st December, 2009 goods sold at a sale price of Rs. 3,000 were lying with customer, Ritu to whom these goods were sold on 'sale or return basis' and recorded as actual sales. Since no consent has been received from Ritu, you are required to pass adjustment entries presuming goods were sent on approval at a profit of cost plus 20%. Present market price is 10% less than the cost price. Solution Journal Entries Date Particulars Dr. Cr. Rs. Rs. 2009 31st Dec. Sales A/c Dr. 3,000 To Ritu's A/c 3,000 (Being cancellation of entry for sale of goods, not yet approved) Stock with customers A/c (Refer W.N.) Dr. 2,250 To Trading A/c 2,250 (Being stock with customers recorded at market price) Working Note: Calculation of cost and market price of stock with customer Sale price of goods sent on approval Rs.3,000 Less: Profit (3,000 x 20/120) Rs. 500 Cost of goods Rs.2,500 Market price = 2,500 - (2,500 x 10%) = Rs. 2,250. SELF EXAMINATION QUESTIONS 1. When a large number of articles are sent frequently on a sale or return basis, it is necessary to maintain (a) Sale journal (b) Goods returned journal (c) Sale or return journal (d) None of the above. 2. On 31st December, 2009 goods sold at a sale price of Rs. 30,000 were lying with customer, Mohan to whom these goods were sold on 'approval or return basis' and recorded as actual sales. Since no consent was received from Mohan, the adjustment entry was made, presuming goods were sent on approval at a profit of cost plus 20%. In the balance sheet, the stock with customers account will be shown at Rs. (a) 30,000. (b) 24,000. (c) 20,000. (d) 25,000. FUNDAMENTALS OF ACCOUNTING 7.109 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS 3. A sent some goods costing Rs. 3,500 at a profit of 25% on sale to B on sale or return basis. B returned goods costing Rs. 800. At the end of the accounting period i.e. on 31st December, 2005, the remaining goods were neither returned nor were approved by him. The stock on approval will be shown in the balance sheet at Rs. (a) 2,000. (b) 2,700. (c) 2,700 less 25% of 2,700. (d) 3,500. 4. A merchant sends out his goods casually to his dealers on approval basis. All such transactions are, however, recorded as actual sales and are passed through the sales book. On 31-12-2009, it was found that 100 articles at a sale price of 200 each sent on approval basis were recorded as actual sales at that price. The sale price was made at cost plus 25%. The amount of stock on approval will be amounting (a) Rs.16,000. (b) Rs. 20,000. (c) Rs. 15,000. (d) None of the above. 5. Umesh sends goods on approval basis as follows: Date Customer's Name Sale price of Goods Accepted Goods January, 2010 Goods Sent Rs. Returned Rs. Rs. 8 Anna 3,500 3,000 500 10 Babu 2,800 2,800 – 15 Chandra 3,680 – 3,680 22 Desai 1,260 1,000 260 The stock of goods sent on approval basis on 31st January will be (a) Rs. 500. (b) Nil. (c) Rs. 260. (d) None of the above. 6. A company sends its cars to dealers on 'sale or return' basis. All such transactions are however treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had cost Rs. 55,000 each have been sent on 'sale or return' and have been debited to customers at Rs. 75,000 each, cost of goods lying with the customers will be (a) Rs. 1,10,000. (b) Rs. 55,000. (c) Rs. 75,000. (d) None of the above. 7. A trader has credited certain items of sales on approval aggregating Rs. 60,000 to Sales Account. Of these, goods of the value of Rs. 16,000 have been returned and taken into stock at cost Rs. 8,000 though the record of return was omitted in the accounts. In respect of another parcel of Rs. 12,000 (cost being Rs. 6,000) the period of approval did not expire on the closing date. Cost of goods lying with customers should be (a) Rs. 12,000. (b) Rs. 54,000. (c) Rs. 6,000. (d) None of the above. 8. Under sales on return or approval basis, the ownership of goods is passed only (a) when the retailer gives his approval (b) if the goods are not returned within specified period. (c) Both (a) and (b) (d) None of the above 9. Under sales on return or approval basis, when transactions are few, the seller, while sending the goods, treats them as 7.110 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (a) an ordinary sale but no entry is passed in the books (b) an ordinary sale and entry for normal sale is passed in the books (c) Approval sale and no entry is passed (d) None of the above 10. Under sales on return or approval basis, when transactions are few and the seller at the end of the accounting year reverse the sale entry, then what will be the accounting treatment for the goods returned by the customers on a subsequent date? (a) No entry will be passed for such return of goods (b) Entry for return of goods is passed by the seller (c) Only the stock account will be adjusted (d) None of the above 11. Which of the following is not a main column of sales or return journal? (a) goods sent on approval column (b) goods returned column (c) goods approved column (d) purchase column 12. Sale or Return Day Book and Sale or Return Ledger are known as (a) principal books (b) subsidiary books (c) memorandum books (d) none of the above 13. In the Sale or Return Ledger (a) all the customers are individually debited and the sale or return account is credited with the periodical total of the Sale or Return Day Book. (b) all the customers are debited in total and the sale or return account is credited with the periodical total of the Sale or Return Day Book. (c) all the customers are individually debited and the sale or return account is also credited with the individual total of the Sale or Return Day Book. (d) None of the above. 14. When the goods are returned by the customers within the specified time, they are recorded (a) initially in the Sale or Return Ledger. Thereafter, in the Sale or Return Day Book (b) initially in the Sale or Return Day Book. Thereafter, in the Sale or Return Ledger (c) only in the Sale or Return Day Book (d) only in the Sale or Return Ledger ANSWERS 1. (c) 2. (d) 3. (b) 4. (a) 5. (b) 6. (a) 7. (c) 8. (c) 9. (b) 10. (a) 11. (d) 12. (c) 13. (a) 14. (b) FUNDAMENTALS OF ACCOUNTING 7.111 Copyright -The Institute of Chartered Accountants of India