Methods of Accounting for Packages and

Containers
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Methods of Accounting for Packages and Containers!

Every businessman wants to maximize his profits. For this, he wants to increase his sales.
Various facilities are provided to the customers. Packages or containers play an important role in
increasing sales.

Goods are very often packed into bottles, boxes, bags, cans, drums, etc. for the purpose of
preserving, transporting and marketing. These packing materials, which are called packages,
containers or empties, are durable as well, as reusable.

The goods are packed by the suppliers for safe delivery at the destination of the customers and
also with the object of putting the goods in a saleable condition. Packages or containers may
either be manufactured by the concern itself or bought from outside.

In either the case, they involve expenditure which must be recovered from the sale price of the
articles packed. Therefore, there is the need for accounting of packages or containers. The
accounting procedure for containers largely depends upon the way in which they are handled.

This could be broadly classified into these categories:

1. Containers Non-returnable:

(a) When a separate charge is not made

(b) When a separate charge is made

2. Containers Returnable:

(a) When separate charge is not made

(b) When separate charge is made

These have been explained below:

1. Containers Non-Returnable When a separate charge is not made:

Since packages are essential for the products, cost of the packages will be included in the selling
price of the commodity. Under such circumstances, containers or packages stock account is
opened.

ADVERTISEMENTS:

This Packages or Containers Stock Account is debited with the Opening Stock and Purchases and
Credit with the Closing Stock. The difference between the two sides shows the cost of containers
consumed. The consumption of packages or containers is transferred to Trading Account, if the
expense is considered as part of the cost of the goods sold or transferred to Profit and Loss
Account if treated as Selling Expenses.

Illustration 1:

A scent manufacturing company had a stock of 10.000 bottles valued at Rs. 25,000 on 1st Jan.
During the year, the company purchased 50.000 bottles @ Rs. 2.50 per bottle. At the close of the
year 7.000 bottles were in the stock. Write the Containers Stock Account.

Solution:

2. Containers Non-Returnablewhen a separate charge is made:

If cost of packages is not included in sale price, the cost is charged from customers separately in
addition to the price of the goods sold. In this case, Package Account is opened. This Account is
debited with opening stock of containers and purchases. It is credited with the amount charged to
customers and closing stock.

The amount charged to customers is generally higher than the cost price. Therefore, the
difference represents profit which the firm makes on account of sale of packages. This profit is
transferred to Profit and Loss Account.

Illustration 2:

From the following information, prepare Containers Account:

Purchased during the year Rs. 72,000

Amount charged to customers Rs. 83,000

Closing stock on Dec. 31 Rs. 15.000

Solution:

3. Containers Returnable When separate charge is not made:

In this case no separate charge is made for the packages or containers. Since packages or contain-
ers are returnable, it is necessary to have a separate account for the packages or containers held
by the customers. Hence opening stock and closing stock of packages or containers is divided
into two one for the packages or containers kept in hand and the other in the hands of the
customers.

In this case, the cost of containers is merged with the selling price of the goods and accounted for
along with the goods sold. That is, the customers are not charged out separately. However, they
are expected to return the containers within a given period.

Normally, the following journal entries are passed:

Goods are delivered by a manufacturing concern in drums which are valued in books at Rs. 20
per item, but charged out to customers at Rs. 40 each. Customers are, however, credited with Rs.
30 for each drum if returned within two months in good condition. Otherwise drums are not
returnable, for which they are treated as sold.

From the following information, draw up Drums Stock Account in the books of the
manufacturing concern:

Out of the total number of drums lying with customers as on 31st Dec. 2005, 6,000 were not
returnable.

(B. Com Calcutta)

Solution:
4. Containers Returnable When separate charge is made:

Under this method, returnable containers are considered to be the special items for trading ac-
count. As such, their cost is not included in the sale price of the goods sold in such containers.
The price of the containers is charged separately to customers. Generally the price charged to
customers is above cost price and hence a profit is made on this account.

The price at which they are charged when sent to customers is known as the charging out
price. The amount credited to a customer on the return of packages is called returnable price.
The trader makes a profit on containers sent out regardless of whether they are returned or not.
There are two methods of accounting to deal with returnable packages and when customers are
charged out separately.

Method 1:

Under this method, two accounts are prepared:

(a) Packages Stock Account and

(b) Packages Trading Account.

(a) Packages Stock Account:

It is debited with the following items:

(i) Opening stock of containers in shop: at cost

(ii) Opening stock of containers with customers: at cost

(iii) Purchase of containers at purchase price

It is credited with the following items:

(i) Containers destroyed, lost, stolen etc. at cost price

(ii) Containers scrapped at cost price

(iii) Depreciation on containers

(iv) Stock of containers in hand and with customers at cost

(b) Containers Trading Account:

It is debited with the following items:

(i) Cost of containers scrapped

(ii) Cost of containers retained

(iii) Cost of maintenance

(iv) Depreciation, if any

It is credited with the following items:

(i) Sale of retained contains at returnable price;

(ii) Rental or hire charges of containers issued to customers;

(iii) Rental on stock returned;

(iv) Cash realised from sale of scrap.

Method II:

Under this method, the following two accounts are prepared:

(i) Packages or Containers Stock Account and

(ii) Packages Suspense or Reserve or Provision Account.

The former account discloses profit or loss on packages and the latter is meant for recording the
movement of packages from the trader to customers and vice versa.

(a) Packages Stock Account:

It is debited with the following items:

(i) Opening stock at hand at cost price;

(ii) Opening stock with customers at cost price;

(iii) Purchase of containers at purchase price;

(iv) Cost of maintenance, repairs etc.

(v) Provision in respect of containers sent to customers at return price.

It is credited with the followings items:

(i) Cost of containers destroyed (abnormal loss)

(ii) Sale proceeds of containers scrapped at actual price

(iii) Containers sent to customers at charged price.

(iv) Containers retained by customers at returnable price.

(v) Closing stock on hand at cost (or valuation)

(vi) Closing stock with customers at cost

The difference between the two sides is either profit or loss.

(b) Containers Suspense Account:

It is debited with the following: items:

(ii) Containers retained by customers at return price;

(iii) Provision necessary at return price for those containers which are in the hands of customers.

It is credited with the following items:

(i) Balance of containers in the hands of customers at return price (beginning provision)

(ii) Containers sent to customers at return price

The two sides of the account must tally.

Illustration 4:

New Chemical Company sells its products in returnable drums. Customers are billed at Rs. 5 for
each drum at the time of sale and credited with Rs. 4 if the drums are returned in two months. In
case drums are returned in damaged condition, credit is given only for Rs. 2.

The following figures are available for the year ended on 31st March 2005:

All stock is to be valued at cost. Damaged drums are to be valued at 50% of cost. During the year
Rs. 1.00,000 was received from Debtors on account of drums.

Solution:
Illustration 5:
Bombay Chemicals Limited supplies their products in returnable containers. A container is
invoiced to the customer at Rs. 50 but if it is returned within two months, a credit of Rs. 45 is
given to the customer. A container costs Rs. 40 to the company and its life is estimated at 5 years
at the end of which the scrap value is likely to be Rs. 5.

The following particulars are supplied to you:

Depreciation is to be provided on straight line method. Prepare Containers Stock Account and
Containers Suspense Account for the year and ascertain the profits or losses earned or incurred in
the year assuming a separate account for provision for depreciation is maintained.

(C.A. Inter)