CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.

6. SALE OF GOODS ON APPROVAL

SALE OF GOODS ON APPROVAL OR RETURN BASIS

• Meaning: Goods are sent but Sale happens only if approval is given by the receiver.
• Modes of Approval: According to section 24, of the Sale of Goods Act, the customer is
deemed to have accepted the goods when he:
• Direct Approval (b) Doing something which implies (indicates) approval and (c) when
approval is not given within specified time / reasonable time, the goods are deemed as
approved.
• Method of Accounting – 3 Methods based on the volume of transactions.

Accounting Treatment

Casually Frequently Numerously

Transaction is Sale or Return Journal is Sale or Sale or

treated as prepared with four main Return Return
Ordinary Sale columns Day Book Ledger

• Goods sent on Approval Treated as

Memorandum Books
• Goods Returned
• Goods Approved
• Balance

• Final Stock lying with the customers belong to the sender and hence recorded at cost
in the books of sender as “Stock on Approval basis”.
• In Stock Reconciliation Statement, cost of such goods shall be added to physical stock
to arrive at book stock.

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 CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.2

1. ACCOUNTING RECORDS
1) When The Business Sends Goods Casually On Sales Or Return
When the transactions are few, the seller on sending the goods, treats them as an
ordinary sale.
No Particulars LF Dr. Cr.
1 When goods are sent on approval or on sale or return basis
Sundry Debtors A/c Dr.
To Sales A/c
2 When goods are rejected or returned within the specified time
Sale/Return Inwards A/c Dr.
To Customers/Sundry Debtors A/c
3 When goods are accepted at invoice price
(No entry)
4 When goods are accepted at a higher price than invoice price
Sundry Debtors A/c Dr.
To Sales A/c
5 When goods are accepted at a lower price than the invoice
price
Sales A/c Dr.
To Sundry Debtors A/c
6 i) At the year-end, when goods are lying with customers and
the specified time limit is yet to expire
Sales A/c Dr.
To Sundry Debtors A/c
6 These goods should be considered as stock with customers
ii) and in addition to the above, the following adjustment entry
is to be passed
Stock with Customers on sale or return A/c Dr.
To Trading A/c (cost price or market price whichever less)
6 No entry is to be passed for goods returned by the
iii) customers on a subsequent date

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 CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.3

2. When The Business Sends Goods Frequently On Sale Or Return Basis

When goods are sent on approval basis normally, a Memorandum Day Book called as
"Goods on Sale or Return Journal" or "Goods sent on Approval Journal" is maintained. A
Memorandum ledger containing Customer's account may also be maintained
Goods sent on approval Goods Returned Goods approved Bal
1 2 3 4 5 6 7 8 9 10 11 12 13
Particulars

Particulars

Particulars
Amount

Amount

Amount
Date

Date

Date

Amt
Fol .
Fol

The following procedure is adopted in this case - Fol

1) When goods are sent out on approval, entries are made in column 1 to 3, by recording
selling price of goods sent in amount column.
2) lf the goods are returned, entries are made in columns 4 to 6, by recording selling
price of goods returned in amount column.
3)lf the goods are accepted by customers, entries are made in columns 7 to 9, by recording
selling price of gooos accepted in amount column. Entry is then passed in regular books
to record a sale.
4) Value of goods sent out but not returned or accepted till the year end is extended in
column 10. The total of this column will show value of goods with customers at selling
price.
5) Goods with customers are then valued at cost price and included in the stock for the
preparation of financial statements.
Accounting entries:

No. Particulars LF Dr. Rs Cr. Rs.

1. At the time of approval

Customer A/c Dr.
To Sales A/c
2. At the time of preparing of Final Accounts Dr.
Goods with customers on Sale or Return A/c
To Trading A/c

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CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.4

1) 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
b) Sale or Return Ledger.
Sale or Return Day Book and Sale or Return Ledger are Memorandum Books.
When goods are sent to the customers on 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 A/c is credited with the periodically 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, 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.
When the business receives information about the acceptance of the goods or no
intimation is received within the specified time, they are recognized as sales and are
recorded in the sales day book. Periodically, the total of the sales day book is credit 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:
No. Particulars LF Dr. Rs Cr. Rs.

1. In the Memorandum Sale or Return Ledger

Sale or Return A/c Dr.
To Individual customer’s A/c
2. In the regular General Ledger
Individual Customer’s A/c Dr.
To Sales A/c
3. Stock with customers at the year end
Stock with customers on Sale or Return A/c
[cost or net realizable value, whichever is less] Dr.
To Trading A/c

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CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.5

Class Work
1. X supplied goods on sale or return basis to customers, the particulars of which are as
under:
Date of dispatch Party’s name Amount ` Remarks
10.12.2017 M/s ABC Co. 10,000 No information till 31.12.2017
12.12.2017 M/s DEF Co 15,000 Returned on 16.12.2017
15.12.2017 M/s GHI Co 12,000 Goods worth ` 2,000 returned on 20.12.17
20.12.2017 M/s DEF Co 16,000 Goods Retained on 24.12.2017
25.12.2017 M/s ABC Co 11,000 Good Retained on 28.12.2017
30.12.2017 M/s GHI Co 13,000 No information till 31.12.2017
Goods are to be returned within 15 days from the dispatch, failing which it will be treated
as sales. The books of ‘X’ are closed on the 31st December, 2017.
Prepare the following account in the books of ‘X’.
Goods on “sales or return, sold and returned day books”. Goods on sales or return total
account. (RTP May 2018)
Answer

In the books of ‘X’

Goods on sales or return, sold and returned day book

Date Party to whom goods sent L.F Amount Date Sold Returned
2017 ` 2017 ` `
Dec.10 M/s ABC 10,000 Dec. 25 10,000 -
Dec.12 M/s DEF 15,000 Dec. 16 - 15,000

Dec.15 M/s GHI 12,000 Dec. 20 10,000 2,000

Dec.20 M/s DEF 16,000 Dec. 24 16,000 -

Dec.25 M/s ABC 11,000 Dec. 28 11,000 -

Dec.30 M/s GHI 13,000 -

77,000 47,000 17,000

Goods on Sales or Return Total Account

2017 Amount 2017 Amount

Dec. 31 To Returns 17,000 Dec. 31 By Goods sent

To Sales 47,000 on sales or return 77,000

To Balance c/d 13,000

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CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.6

77,000 77,000

2. Mr. Badhri sends goods to his customers on Sale or Return. The following transactions took
place during the month of December 2017.
December 2nd - Sent goods to customers on sale or return basis at cost plus 25%
- 80,000
December 10th - Goods returned by customers ` 35,000
December 17th - Received letters from customers for approval ` 35,000
December 23rd - Goods with customers awaiting approval ` 15,000
Mr. Badhri records sale or return transactions as ordinary sales. You are required to pass
the necessary Journal Entries in the books of Mr. Badhri assuming that the accounting
year closes on 31st Dec. 2017. (QP May 18)
Answer

In the books of Mr. Badhri Journal Entries

Date Particulars L.F. Dr. Cr.

2017
Dec. 2 Trade receivables A/c Dr. 80,000
To Sales A/c 80,000
(Being the goods sent to customers on sale or
return basis)
Dec. 10 Return Inward A/c (Note 1) Dr. 35,000
To Trade receivables A/c 35,000
(Being the goods returned by customers to whom
goods were sent on sale or return basis)
Dec. 23 Sales A/c Dr. 15,000
To Trade receivables A/c 15,000
(Being the cancellation of original entry of sale in
respect of goods on sale or return basis)
Dec. 31 Inventories with customers on Sale or Return A/c Dr. 12,000

To Trading A/c (Note 3) 12,000

(Being the adjustment for cost of goods lying with
customers awaiting approval)
Note:
(1) Alternatively, Sales account or Sales returns can be debited in place of Return
Inwards account.
(2) No entry is required for receiving letter of approval from customer.
(3) Cost of goods with customers = ` 15,000 x 100/125 = ` 12,000

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CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.7

(4) It has been considered that the transaction values are at involve price (including
profit margin).

3. Mr. Ganesh sends out goods on approval to few customers and includes the same
in the Sales Account. On 31.03.2018, the Trade Receivables balance stood at ` 75,000
which included ` 6,500 goods sent on approval against which no intimation was
received during the year. These goods were sent out at 30% over and above cost
price and were sent to -
Mr. Adhitya ` 3,900 and Mr. Bakkiram ` 2,600.

Mr. Adhitya sent intimation of acceptance on 25" April, 2018 and Mr. Bakkiram
returned the goods on 15th April, 2018.

Make the adjustment entries and show how these items will appear in the Balance
Sheet as on 31st March, 2018. Show also the entries to be made during April, 2018.
Value of Closing Inventories as on 31st March, 2018 was ` 50,000. (QP Nov 18)

Solution
In the Books of Mr. Ganesh Journal Entries
Dr. Cr.
Date Particulars L.F. ` `
2018 Sales A/c Dr. 6,500
March 31 To Trade receivables A/c 6,500
(Being the cancellation of original entry for
sale in respect of goods lying with customers
awaiting approval)
March 31 Inventories with Customers on Sale or Return Dr. 5,000
A/c
To Trading A/c (Note 1) 5,000
(Being the adjustment for cost of goods
lying with customers awaiting approval)
April 25 Trade receivables A/c Dr. 3,900
To Sales A/c 3,900
(Being goods costing worth ` 3,900 sent to
Mr. Aditya on sale or return basis has been

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CA FOUNDATION MARATHON | SALE OF GOODS ON APPROVAL 6.8

accepted by him)

Balance Sheet of Mr. Ganesh as on 31st March, 2018 (Extracts)

Liabilities ` Assets ` `
Trade receivables (` 75,000 - ` 6,500) 68,500
Inventories-in-trade 50,000
Add: Inventories with customers on Sale
or Return 5,000 55,000
1,23,500
Notes:
(1) Cost of goods lying with customers = 100/130 x ` 6,500 = ` 5,000
(2) No entry is required on 15th April, 2018 for goods returned by Mr. Bakkiram. Goods
should be included physically in the Inventories.

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