Adjustment of Sale of Goods on Sale or Return Basis in Final Accounts (Financial Statements)

Sale of goods may be made on a sale or return basis. This sale should not be recorded as an actual sale until the customer gives his approval of acceptance. In case the goods sent to customers have been recorded as an actual sale, an adjusting entry has to be passed to nullify the effect that has taken place i.e. it will be recorded as an inventory lying with the customers at the end of the year.

 Adjustment:

A. If Sale of Goods on Sale or Return Basis is given outside the trial balance

In such a case, the following effects will take place:

• Deducted from Sales A/c in the Cr. Side of the Trading A/c. [At Selling Price]
• Deducted from Debtors on the Assets side of the Balance Sheet. [At Selling Price]
• Added to Closing Stock in the Cr. side of the Trading A/c. [At Cost Price]
• Added to Closing Stock in the Assets side of the Balance Sheet. [At Cost Price]

Illustration:

Following is the trial balance of Mr. Rajan.

The following adjustments were noted:

1. Goods to be used in business amounting to ₹10,000.
2. The manager is entitled to commission @10% on net profit before charging such commission.
3. Out of the total Advertisement expenditure incurred, only ₹4,000 belongs to the current year.
4. Goods are sent to customers on a sale or return basis at cost plus 25% profit, the cost is ₹10,000.
5. Goods in transit costs ₹2,000.
6. Closing stock ₹4,500 to be taken into account.

Prepare Trading A/c, P & L A/c, and Balance sheet.

Solution:

Note: Contingent Liability will not be taken into account in the Balance sheet. It will be shown in Notes to Account.

Working Notes:

1. Calculation of Manager’s Commission

Manager’s Commission =