Sale or Return Basis Accounting

Sale or return basis accounting is a term used to refer to an arrangement whereby a business sends goods to a customer and gives them the option to either approve and retain the goods or to return them within an agreed period of time.

It is important to understand that although possession of the goods is transferred from the business to the customer, the business retains ownership of the goods until the customer either approves them by agreeing to purchase the goods or does not return them in the agreed period of time.

This is in contrast to consignment sales where ownership is always retained by the consignor and never passes to the agent.

Sale or Return Basis Accounting System

The sale of return accounting system requires two additional bookkeeping records to be established.

Sale or Return Daybook

The sale or return daybook is part of the special journal and is a book of prime entry. The daybook is sometimes referred to as the sale or return journal and is used to record sale or return basis transactions in chronological (date) order from original accounting source documents.

The sale and return daybook can have multiple columns to allow the recording of goods sent, returned, and approved.

Sale or Return Ledger

The sale or return ledger is a subsidiary ledger used to record sale or return basis transactions by customer.

The ledger includes individual accounts for each customer and also a total account used to record the sale or return daybook totals. The total account acts as a control account.

At any point in time the balance on a customer account represents unapproved goods held by the customer.

A reconciliation between the sale or return total account and the total of the individual customer accounts in the ledger forms an effective internal control procedure for the business to ensure that all transactions have been correctly posted.

The diagram below shows the relationship between the sale or return daybook and the sale or return ledger together with its total account.

sale or return

It should be noted that both the sale or return daybook and the sale or return ledger are for memorandum purposes only and do not from part of the double entry bookkeeping system.

Goods on Sale or Return Basis Example

Sale or return basis bookkeeping entries are best explained by reference to an example and the diagram above.

Suppose a business sends goods on a sale or return basis to two customers. Customer A is sent goods with a sale price value of 2,000 and customer B is sent 1,500.

During the period customer A returns 1,200 and approves 500, and customer B returns 600 and approves 300.

Goods Sent

The first step is to record each of the goods sent transactions in the sale or return daybook as shown in the diagram above.

Using the sales daybook the individual customer transactions are then posted to the appropriate customer account in the sale or return ledger. The daybook totals form the other side of this memorandum entry to the total account also in the sale or return ledger.

Goods Sent
Account Debit Credit
Customer A 2,000
Customer B 1,500
Sale or return total account 3,500
Total 3,500 3,500

This is a memorandum entry and is not a double entry posting in the bookkeeping system.

Goods Returned

When a customer returns goods the transactions are similarly recorded in the sale or return daybook as indicated in the diagram above.

Using the sales daybook the individual customer retained transactions are posted to the appropriate customer account in the sale or return ledger. The daybook totals form the other side of this memorandum entry to the total account also in the sale or return ledger.

Goods Returned
Account Debit Credit
Sale or return total account 1,800
Customer A 1,200
Customer B 600
Total 1,800 1,800

Again this entry is a memorandum entry and is not a double entry posting in the bookkeeping system.

Goods Approved

When the customer approves the goods or retains the goods beyond the agreed term then they are deemed to have been sold to the customer. The amount is recorded in the approved column of the sale or return ledger as shown in the diagram above.

Using the sales daybook the individual customer approved transactions are posted to the appropriate customer account in the sale or return ledger. As before, the daybook totals form the other side of this memorandum entry to the total account also in the sale or return ledger.

Goods Approved
Account Debit Credit
Sale or return total account 800
Customer A 500
Customer B 300
Total 800 800

Again this entry is a memorandum entry and is not a double entry posting in the bookkeeping system.

Recording the Sale

The goods approved by the customer are treated as being sold and the sale of the goods is recorded in the same way as any other sale. The transactions are listed in the sales daybook, sales ledger, and subsequently posted to to general ledger.

Sales
Account Debit Credit
Accounts receivable 800
Sales 800
Total 800 800

Further details of the recording of sales transactions can be found in our sales journal post.

In this case the posting is part of the double entry bookkeeping.

Balance on the Sale or Return Total Account

The balance on the total account in the sale or return ledger is the net result of posting the sent, returned, and approved transactions.

Balance = Sent – Returned – Approved

In this example the balance is calculated as follows.

Balance = Sent - Returned - Approved
Balance = 3,500 - 1,800 - 800 = 900

As shown in the diagram above the balance on the sale or return total account is also the balance of all the transactions in the sale or return daybook.

The balance of 900 represents the sales price value of the unapproved goods currently held by customers on a sale or return basis.

The amount held by each customer can be seen by looking at the individual customer sale or return ledger accounts. In this example the balances are calculated as follows.

Balance = Sent - Returned - Approved
Customer A balance = 2,000 - 1,200 - 500 = 300
Customer B balance = 1,500 - 600 - 300 = 600

It should be noted that the goods forming the total account balance belong to the business not the customer and the cost of these goods must be included in the inventory count and the closing inventory adjusting entry at the end of the accounting period.

Sale or Return Basis Accounting November 7th, 2018Team

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