6.

32 PRINCIPLES AND PRACTICE OF ACCOUNTING

UNIT 2 : SALE OF GOODS ON APPROVAL OR RETURN BASIS

LEARNING OUTCOMES
After studying this unit, you will be able to:
w Understand the nature of goods sent on approval or return basis.
w Learn the accounting treatment of sales on approval or return basis under different situations

UNIT Sale of Goods on Approval or Return Basis

OVERVIEW
Accounting treatment when the business sends goods

Casually Frequently Numerously

Sales or Sales or
Transaction Sales or
Return Return Day Return
is treated Book Ledger
Journal is
as Ordinary prepared
Sale with four
main
columns Treated as
Memorandum
Books

Goods sent Goods Goods

Balance
on Approval Returned Approved

2.1 INTRODUCTION
Under normal course of business, goods sold to customers is treated as sale immediately when the goods
are sold, with corresponding revenue from such sale being recognized in the profit and loss account.
However, when a businessman wants to increase his sales or introduce a new product in the market, he
usually faces hardship due to competition prevailing in the market. To counter it, goods are sometimes sent
to the customers on sale or return basis. Here, goods sent on ‘approval’ or ‘on return’ basis means goods are
delivered to the customers with the option to retain or return them within a specified period. Generally,
these transactions take place between a manufacturer (or a wholesaler) and a retailer. In current scenario,
this practice is prevalent in case of online sales, where the buyer is given time of few days to return the goods
if the buyer believes that the specifications of goods are different from the same mentioned on website at
the time of sale. There may be certain terms and conditions to administrate the return of goods. Following
are essentially the features of sale of goods on approval or return basis:
(a) There is a change in the possession of goods from one person to another.

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.33

(b) It does not involve transfer of ownership of goods. The ownership is passed only when the buyer gives
his approval or if the goods are not returned within that specified period.
(c) The customer does not incur any liability when the goods are merely sent to him. In case of online
transactions, sometimes customers are given choice to pay on receipt of goods and in some cases they
are required to pay in advance and then seller ships the goods to buyer. Even in case the buyer has
paid in advance, it retains the right of refund if the goods are returned as per the terms and conditions
agreed between seller and buyer.
As per the definition given under the Sale of Goods Act, 1930, in respect of such goods, the sale will take
place or the property in the goods pass to the buyer under any of the following conditions is satisfied:
(i) When he signifies his approval or acceptance to the seller;
(ii) When he does some act adopting the transaction;
(iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving
notice of rejection, on the expiry of the specified time (if a time has been fixed) or on the expiry of
a reasonable time (if no time has been fixed).

2.2 ACCOUNTING RECORDS

Accounting entries depend on the fact whether the business sends goods on sale or return basis (i) casually;
(ii) frequently; and (iii) numerously.

2.2.1 WHEN THE BUSINESS SENDS GOODS CASUALLY ON SALE OR RETURN BASIS
When the transactions are few, the seller on sending the goods, treats them as an ordinary sale. If the goods
are accepted or not returned or the business receives no intimation within the specified time limit, no extra
entry is required to be passed because the entry for sale (passed at the time of sending goods) becomes the
usual entry after the expiry of the specified period. If the goods are returned within a specified time limit, a
reverse entry is passed to cancel the previous transaction. If, at the year-end, goods are still lying with the
customers and the specified time limit is yet to expire, the entry for sales made earlier is cancelled and the
value of the goods lying with the customers must be reduced from the selling price to the cost price, and
treated as part of closing inventories Inventories for Balance Sheet purposes.
Journal Entries:
1. When goods are sent on sale or return basis:
Trade receivables / Customers Account Dr. [Invoice price]
To Sales Account
2. When goods are rejected or returned within the specified time:
Sales/Return Inwards Account Dr. [Invoice price]
To Customers/Trade receivables Account
3. When goods are accepted at invoice price:
[No entry]

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6.34 PRINCIPLES AND PRACTICE OF ACCOUNTING

4. When goods are accepted at a higher price than invoice price:

Trade receivables / Customers Account Dr.
To Sales Account [Difference in price]
5. When goods are accepted at a lower price than the invoice price:
Sales Account Dr.
To Trade receivables / Customers Account [Difference in price]
6. (i) At the year-end, when goods are lying with customers and the specified time limit is yet to expire:
Sales Account Dr. [Invoice price]
To Trade receivables / Customers Account
(ii) These goods should be considered as Inventories with customers and in addition to the above, the
following adjustment entry is to be passed:
Inventories with Customers on Sale or Return Account Dr.
To Trading Account [Cost price or market price whichever is less]

No entry is to be passed for goods returned by the customers on a subsequent date.

? ILLUSTRATION 1

CE sends goods to his customers on Sale or Return basis. The following transactions took place during 2019:

Sept. 15 Sent goods to customers on sale or return basis at cost plus 33 1/3 % ` 1,00,000
Oct. 20 Goods returned by customers ` 40,000
Nov. 25 Received letters of approval from customers ` 40,000
Dec . 31 Goods with customers awaiting approval ` 20,000
CE records sale or return transactions as ordinary sales. You are required to pass the necessary Journal Entries in
the books of CE assuming that accounting year closes on 31st December, 2019.

 SOLUTION
In the books of CE
Journal Entries

Date Particulars L.F. Dr. (in ` ) Cr. (in ` )

2019
Sept. 15 Trade receivables A/c Dr. 1,00,000
To Sales A/c 1,00,000
(Being the goods sent to customers on sale or return
basis )

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.35

Oct. 20 Return Inward A/c (Note 1) Dr. 40,000

To Trade receivables 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 Trade receivables A/c 20,000
(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. 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.
` 20,000 × 100
(3) Cost of goods with customers = = `15,000
133.33
? ILLUSTRATION 2

Amit runs an online store where in the goods are casually sold on sale on approval basis, the following is the
information provided to you during 2020:
Date Particulars Amt (in `)
10th Feb Sale on approval basis- 25% on cost 1,20,000 (cost)
20th Feb Goods returned by customers 80,000
15th March Goods for which approval given by customers 40,000
31st March Goods with customers awaiting approval 30,000
All the above goods are sold ordinarily in the course of the online business. Considering that he closes his books
on 31st March 2020, you are required to pass entries in the books of Amit, to record the above transactions.
Note- Additionally it has been provided that on 15th April 2020, the customers have rejected the goods for which
approval has been pending on 31st March, deal with the same accordingly.

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6.36 PRINCIPLES AND PRACTICE OF ACCOUNTING

 SOLUTION
In the books of Amit
Journal Entries

Date Particulars L.F. Dr. (in ` ) Cr. (in ` )

10/2/2020 Trade receivables A/c Dr. 1,50,000
To Sales A/c 1,50,000
(Being the goods sent to customers on sale or
return basis)
Note- 1,20,000* 25%=30,000
Sales price= 1,20,000+30,000= 1,50,000
20/2/2020 Sales A/c Dr. 80,000
To Trade receivables A/c 80,000
(Being the goods returned by customers to whom
goods were sent on sale or return basis)
15/3/2020 There is no entry to be passed- since we have initially recorded it as sales, so when the
customer approves it, no entry to be passed once again
31/3/2020 Sales A/c Dr. 30,000
To Trade receivables A/c 30,000
(Being the cancellation of original entry of sale in
respect of goods on sale or return basis)
31/3/2020 Inventories with customers on Sale or Return A/c Dr. 24,000
To Trading A/c 24,000
(Being the adjustment for cost of goods lying with
customers awaiting approval)
Note- 30,000* 20%= 6,000
Cost price= 30,000-6,000= 24,000
15/4/2020 There is no need to pass the entry for the return of the goods as they have already been
reversed as on 31st March 2020.

? ILLUSTRATION 3

Mr. Kumar sells goods on approval or return basis casually. He has sold goods worth Rs. 1,50,000, (sold at a profit
of 33 1/3% on sale) which has been awaiting approval from the customers as on the date of closing the books.
After the expiry of the period, the customers have accepted goods equivalent to 75% of the cost of the goods and
the rest considered to be rejected.

You are required to show the necessary journal entries as on the date of closing the books and the entries after the
expiry of the period and the treatment of the goods.

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.37

 SOLUTION
In the books of Kumar
Journal Entries
Date Particulars L.F. Dr. (in ` ) Cr. (in ` )
Closing Sales A/c Dr. 1,50,000
date To Trade receivables A/c 1,50,000
(Being the cancellation of original entry of sale in
respect of goods on sale or return basis)
Inventories with customers on Sale or Return A/c Dr. 1,00,000
To Trading A/c 1,00,000
(Being the adjustment for cost of goods lying with
customers awaiting approval)
Note- 1,50,000* 1/3= 50,000
Cost price= 1,50,000-50,000= 1,00,000
On expiry Trade receivables A/c Dr. 75,000
of approval To Sales A/c 75,000
period (being the goods equal to 75% of the cost of
goods sent on approval basis, with the remaining
being rejected)
Note: 1,00,000*75% = 75,000 (accepted)
1,50,000-75,000 = 75,000 (rejected)
There is no need to pass the entry for the return of the goods as they have already been
reversed as on the closing date.

? ILLUSTRATION 4

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 31.03.2020, 200 such
goods have been sent to a dealer at `250 each (cost ` 200 each) on sale or return basis and debited to his account.
Of these goods, on 31.03.2020, 50 were returned and 70 were sold while for the other goods, date of return has
not yet expired.
Pass necessary adjustment entries on 31.03.2020.

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6.38 PRINCIPLES AND PRACTICE OF ACCOUNTING

 SOLUTION
In the books of S. Ltd.
Journal Entries

Date Particulars L.F. ` `

2020
March 31 Return Inwards A/c (` 250 X 50) Dr. 12,500
To Trade receivables 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)
March 31 Sales A/c (` 250 X 80) (Note 1) Dr. 20,000
To Trade receivables 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)
March 31 Inventories 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 approval or
return basis not yet approved, adjusted)
Note: (1) Quantity of goods lying with dealer as on 31.3.2020 = 200 – 50 – 70 = 80

? ILLUSTRATION 5

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 ` 900 each have been sent to the dealer on ‘sale or return basis’ and have been
debited to his account at `1,200 each. Out of this only 20 gas containers are sold at `1,500 each.
You are required to pass necessary adjustment entries for the purpose of Profit and Loss Account and Balance
Sheet.

 SOLUTION
In the books of Caly Company
Journal Entries

Date Particulars L.F. ` `

Trade receivables 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 Trade receivables A/c 96,000
(Being the cancellation of original entry for sale in respect of 80
gas containers @ ` 1,200 each)

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.39

Inventories 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 6

E Ltd. sends out its accounting machines costing ` 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 March 24, 2020, 300 such accounting machines were sent out at an invoice price of
` 280 each, out of which only 90 accounting machines are accepted by the customers ` 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 March 31, 2020.

 SOLUTION
In the books of E Ltd.
Journal Entries

Date Particulars L.F. ` `

2020
March 31 Sales A/cs (` 30x90) Dr. 2,700
To Trade receivables A/c 2,700
(Being the adj. for reduction in the selling price of 90 accounting
machines @ ` 30 each)
March 31 Sales A/c (` 280 x 210) Dr. 58,800
To Trade Receivables 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)
Inventories with customers on Sale or Return A/c Dr. 42,000
To Trading A/c 42,000
(Being the cost of 210 accounting machines @ `200 each
adjusted against Trading Account)

? ILLUSTRATION 7

A sends out goods on approval to few customers and includes the same in the Sales Account. On 31.3.2020, the
Trade receivables balance stood at `1,00,000 which included `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 - ` 4,000 and Mr. Y - ` 3,000.
Mr. X sent intimation of acceptance on 30th April and Mr. Y returned the goods on 10th April, 2020.

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6.40 PRINCIPLES AND PRACTICE OF ACCOUNTING

Make the adjustment entries and show how these items will appear in the Balance Sheet on 31st March, 2020.
Show also the entries to be made during April, 2020. Value of closing Inventories as on 31st March, 2020 was
`60,000.

 SOLUTION
In the Books of A
Journal Entries

Date Particulars L.F. ` `

2020 Sales A/c Dr. 7,000
March To Trade receivables A/c 7,000
31 (Being the cancellation of original entry for sale in respect of
goods lying with customers awaiting approval)

31-Mar Inventories with Customers on Sale or Return A/c Dr 5,600

To Trading A/c (Note 1) 5,600
(Being the adjustment for cost of goods lying with customers
awaiting approval)

30-Apr Trade receivables A/c Dr. 4,000

To Sales A/c 4,000
(Being goods costing ` 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, 2020 (Extracts)

Liabilities ` Assets ` `
Trade receivables ( `1,00,000 - ` 7,000) 93,000
Inventories-in-trade 60,000
Add: Inventories with customers on Sale or Return
5,600 65,600
1,58,600

Notes:
(1) Cost of goods lying with customers = 100/125 x ` 7,000 = ` 5,600
(2) No entry is required on 10th April, 2020 for goods returned by Mr. Y. Goods should be included physically
in the Inventories-in-trade.

2.2.2 WHEN THE BUSINESS SENDS GOODS FREQUENTLY ON SALE OR RETURN BASIS
When a business sends goods on sale or return on a frequent basis, an immediate sale 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 does not record it as a sale and, therefore, does not
debit the customer with the sales price.
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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.41

Under this method, record of goods sent is maintained in a specially ruled Sale or Return Journal / Day Book
instead of passing entry for sale of goods. 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:

w 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.

w 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.

w 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.

w 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 – Value of Goods Returned – 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 Inventories on approval basis.
The amount, after eliminating the element of profit, is included in the Trading Account representing the
value of Inventories with customers at cost price. Like an ordinary closing Inventories, such goods are
considered as Inventories lying with customers on behalf of seller and are valued at cost or net realisable
value whichever is less.

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6.42 PRINCIPLES AND PRACTICE OF ACCOUNTING

(i) At the time of approval

Customer’s A/c Dr.
To Sales A/c
(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]

2.2.3 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. ‘Day Book’ is the primary book which records all transactions, and from there these are entered in
the ‘Sale or Return’ Total account. It is important to remember that both are Memorandum Books, i.e., these
records are not a part of regular books of accounts.
Following procedure is adopted for recording transactions under this method:

w When goods are sent to the customers on a sale or return basis, they are first 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.

w 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.

w 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

w 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 Inventories 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:
Inventories with Customers on Sale or Return Account Dr. [Cost or net realisable
To Trading Account value whichever is less]

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.43

In short, under this method, entries are passed in the regular books of account only at the time of sale or a
year end, if inventory is still lying with customers (pending approval).

SUMMARY
• As per the definition given under the Sale of Goods Act, 1930, in respect of such goods, the sale will take
place or the property in the goods pass to the buyer:
(i) When he signifies his approval or acceptance to the seller;
(ii) When he does some act adopting the transaction;
(iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving
notice of rejection, on the expiry of the specified time (if a time has been fixed) or on the expiry of
a reasonable time
• Accounting entries depend on the fact whether the business sends goods on sale or approval basis (i)
casually; (ii) frequently; and (iii) numerously.

TEST YOUR KNOWLEDGE

True and False

1. Goods sold on approval or return basis are not recorded as credit sales initially when they are sent out.
2. The customer retains the goods even after the expiry of the mentioned term, but this act does not
confirm to sale of goods as there is no express consent given.
3. At the end of the year- those goods on approval basis awaiting approval from the customer are shown
as part of sales in the books of the seller.
4. No entry needs to be passed in the books of the seller, when the customer rejects the goods awaiting
approval after the closing of the books of the seller.
5. The period within which the customer has to reject or accept is fixed by the buyer.
6. Mere transfer of the possession of the goods from the seller to the customer under sale on approval
basis, also ensure transfer of ownership to customer.
Multiple Choice 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
2. Sale or Return Day Book and Sale or Return Ledger are known as
(a) principal books (b) subsidiary books (c) memorandum books
3. A sent some goods costing ` 3,500 at a profit of 25% on sale to B on sale or return basis. B returned
goods costing ` 800. At the end of the accounting period i.e. on 31st December, 2020, the remaining
goods were neither returned nor were approved by him. The Inventories on approval will be shown in
the balance sheet at `

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 6.44 PRINCIPLES AND PRACTICE OF ACCOUNTING

(a) 2,000. (b) 2,700 (c) 2,700 less 25% of 2,700.

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 31-12-2020, 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 Inventories on approval will be
amounting
(a) ` 16,000. (b) ` 20,000. (c) ` 15,000.

5. Umesh sends goods on approval basis as follows:

Date Customer’s Name Sale price of Goods Accepted Goods Returned

January, 2020 Goods Sent ` `
`
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 Inventories of goods sent on approval basis on 31st January will be

(a) ` 500. (b) Nil. (c) ` 260.
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 ` 55,000 each have been sent on ‘sale or return’ and have been debited to
customers at ` 75,000 each, cost of goods lying with the customers will be
(a) ` 1,10,000. (b) ` 55,000. (c) ` 75,000.
7. A trader has credited certain items of sales on approval aggregating ` 60,000 to Sales Account. Of these,
goods of the value of `16,000 have been returned and taken into Inventories at cost ` 8,000 though the
record of return was omitted in the accounts. In respect of another parcel of `12,000 (cost being ` 6,000)
the period of approval did not expire on the closing date. Cost of goods lying with customers should be
(a) ` 12,000. (b) ` 54,000. (c) ` 6,000.
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)
9. Under sales on return or approval basis, when transactions are few, the seller, while sending the goods,
treats them as
(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

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.45

(c) Approval sale and no entry is passed

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 Inventories account will be adjusted

Theory Questions
Q1. What are the features of sale of goods on approval or return basis? Explain in brief.
Q2. When ‘sale or return basis’ transactions are numerous, what books are maintained by the business
entity.

Practical Questions
Q1 A firm sends goods on sale or return basis. Customers having the choice of returning the goods within
a month. During May 2020, the following are the details of goods sent:

Date (May) 2 8 12 18 20 27
Customers P B Q D E R
Value (`) 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, 2020.
Q2 On 31st December, 2020 goods sold at a sale price of ` 3,000 were lying with customer, Ritu to whom
these goods were sold on ‘sale or return basis’ were 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.
Q3 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

`
10.12.2019 M/s. ABC 10,000 No information till 31.12.2019
12.12.2019 M/s. DEF 15,000 Returned on 16.12.2019
15.12.2019 M/s. GHI 12,000 Goods worth ` 2,000 returned on 20.12.2019
20.12.2019 M/s. DEF 16,000 Goods Retained on 24.12.2019
25.12.2019 M/s. ABC 11,000 Good Retained on 28.12.2019
30.12.2019 M/s. GHI 13,000 No information till 31.12.2019
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, 2020.

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 6.46 PRINCIPLES AND PRACTICE OF ACCOUNTING

Prepare the following accounts in the books of ‘X’.

(a) Goods on “sales or return, sold and returned day books”.
(b) Goods on sales or return total account.

ANSWERS/HINTS
True and False
1. False: They are recorded as sales irrespective of whether the customer might accept or reject the goods
at the end of the period given for the approval.
2. False: As per the Sale of goods Act, when the goods are retained by the customer after the given time
and no express intimation is given with regard to rejection- they are deemed sales.
3. False: At the end of the accounting period- if there are goods sold on approval or return basis, without
any information, then the accounting treatment s to reverse the same from the sales and to add it with
the existing closing stock at cost price.
4. True: At the end, already the entries pertaining to the reversal of the sale and the addition to the closing
stock would have been passed. If subsequently if the customer rejects the goods, no further entry needs
to be passed
5. False: It is the seller who fixes the terms of the period within which the customer has to get back with
the answer of rejection or accepting the goods.
6. False: Only upon accepting the goods expressly or doing some act, inconsistent with the title of goods,
the ownership and risk associated with the goods pass on to the buyer. Mere transfer of possession
does no convey ownership.
MCQs

1. (c) 2. (c) 3. (b) 4. (a) 5. (b) 6 (a)

7. (c) 8. (c) 9. (b) 10. (a)

Theoretical Questions
1. Features of sale of goods on approval or return basis: (i) There is a change in the possession of goods
from one person to another. (ii) It does not involve transfer of ownership of goods. The ownership is
passed only when the retailer gives his approval or if the goods are not returned within that specified
period. (iii) The retailer (customer) does not incur any liability when the goods are merely sent to him.
2. 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. ‘Day Book’ is the primary book which records all transactions, and from there these are
entered in the ‘Sale or Return’ Total account. It is important to remember that both are Memorandum
Books, i.e., these records are not a part of regular books of accounts.

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 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.47

Practical Questions

Answer 1
Sale or Return Account

Date Particulars ` Date Particulars `

2020 2020
31-May To Sundries: Sales 24,000 31-May By Sundries
15-Jun To Sundries: Returned 43,000 (Goods sent on sale or
return basis) 93,000
15-Jun To Balance c/d 26,000
93,000 93,000
By Balance b/d 26,000
P’s Account
Date Particulars ` Date Particulars `
2020 2020
May 31 To Sale or Return A/c 15,000 May 31 By Sale or Return A/c 15,000
Answer 2
Journal Entries

Date Particulars ` `
2020
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)
Inventories with customers A/c (Refer W.N.) Dr. 2,250
To Trading A/c 2,250
(Being Inventories with customers recorded at market
price)

Working Note:
Calculation of cost and market price of Inventories with customer

Sale price of goods sent on approval ` 3,000

Less: Profit (3,000 x 20/120) ` 500
Cost of goods ` 2,500
Market price = 2,500 - (2,500 x 10%) = ` 2,250.

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 6.48 PRINCIPLES AND PRACTICE OF ACCOUNTING

Answer 3
In the books of ‘X’
Goods on sales or return, sold and returned day book.

Date Party to whom goods L.F Amount Date Sold Returned

2019 sent ` 2019 ` `
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

Date Particulars Amount Date Particulars Amount

` `
2019 2019
Dec. 31 To Returns 17,000 Dec. 31 By Goods sent on
sales or return
To Sales 47,000 77,000
To Balance c/d 13,000
77,000 77,000

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