SALE OF GOODS ON APPROVAL OR RETURN BASIS

CONCEPT
1. Need: In order to increase the sales of a product or to introduce a new product, a Firm may sell goods
on approval or return basis.
Generally, these transactions take place between the Manufacturer (or Wholesaler) and a Retailer.

2. Effect: In a Sale of Goods on Approval or Return basis, the goods will be delivered to the customers,
with the option of either retaining them or returning them within a specified period.

3. Possession Vs Ownership: When goods are sold on Approval or Return basis, there is a change in
possession of goods only, and not a transfer of ownership of goods.

4. Transfer of Ownership: As per the Sale of Goods Act, in respect of goods sent on approval or return
basis, the transfer of ownership will take place only ─
(a) When the Buyer / Customer gives his approval, (Direct consent).
(b) When the Buyer / Customer does some act which denotes that he accepts the transaction, i.e.
consumption or use of the goods involved, (Implied consent)
(c) If the Buyer / Customer has not given his approval or acceptance to the Seller but retains the goods
without giving the 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) (Lapse of time).

METHODS OF ACCOUNTING

ACCOUNTING TREATMENT

When transactions are very less, When transactions are very When transactions are very
i.e. casual Sale or Return frequent, but not frequent and numerous
numerous i.e. frequent Sale
or Return

Transaction is treated as Sale or Return Journal Sale or Return Day Book

Ordinary Sales. is prepared with 4 main and Sale or Return Ledger
columns. are prepared. These are
regarded as Memorandum
Books.

JOURNAL ENTRIES WHEN THE FIRM SENDS GOODS CASUALLY ON SALE OR RETURN BASIS
(INFREQUENT)

Transaction Journal Entry Remarks

1. Goods dispatched on Approval or Sundry Debtors Dr. At Selling Price.
Return Basis To Sales A/c

The Copyright of these notes is with CA. Nitin Goel

2. Goods returned by customer within the Sales Returns or (Sales) A/c Dr. At Selling Price.
specified period To Sundry Debtors A/c
3. Goods accepted by Customer within No separate Journal Entry is Not Applicable
specified period required since it is already recorded
as Normal Sales only.
4. Goods accepted at a price higher than Sundry Debtors A/c Dr. Difference in
the Invoice Price To Sales A/c Price only.
5. Goods accepted at a price lower than Sales A/c Dr. Difference in
the Invoice Price To Sundry Debtors A/c price only.
6. Goods pending approval at the end of Sales A/c Dr. At Selling Price
the accounting period To Sundry Debtors A/c
7. Recognition of Stock with customers at Stock with Customers A/c Dr. Cost or NRV,
year ─ end To Trading Account whichever is less.

The Copyright of these notes is with CA. Nitin Goel

Question 1
X. 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
31.12.2021, 200 such goods have been sent to a dealer at Rs.250 each (cost Rs. 200 each) on sale or
return basis and debited to his account. Of these goods, on 31.12.2021, 50 were returned and 70 were
sold while for the other goods, date of return has not yet expired.
Pass necessary adjustment entries on 31.12.2021.

Solution
Journal Entries
Date Particulars L.F. Dr. Cr.
Sales/Sales Return A/c Dr. (250*50) 12,500
To Debtors A/c 12,500
31.12.21
(Being adjustment for 50 units of goods returned by
customers to whom goods sent on sale or return basis)
Sales A/c Dr. (250*80) 20,000
To Debtors A/c 20,000
31.12.21
(Being cancellation of entry for sale of goods not yet
approved in respect of 80 units)
Stock with Customers A/c Dr. (200*80) 16,000
31.12.21 To Trading A/c 16,000
(Being inventories with customers recorded at cost)
Note: No entry in respect of goods approved by the customers.
No. of units left = 200-50-70=80

Question 2
M Ltd. sends out its accounting machines costing Rs. 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 December 24, 2021, 300 such accounting machines were
sent out at an invoice price of Rs. 280 each, out of which only 90 accounting machines are accepted by
the customers Rs. 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 December 31, 2021.

Solution
Journal Entries
Date Particulars L.F. Dr. Cr.
Sales A/c Dr. (30*90) 2,700
To Debtors A/c 2,700
31.12.21
(Being adjustment for reduction in selling price of 90
accounting machines @30 each)
Sales A/c Dr. (280*210) 58,800
To Debtors A/c 58,800
31.12.21
(Being cancellation of entry for sale of goods not yet
approved in respect of 210 machines)
Stock with Customers A/c Dr. (200*210) 42,000
31.12.21 To Trading A/c 42,000
(Being inventories with customers recorded at cost)

Question 3
Mr. Ganesh sends out goods on approval to few customers and includes the same in the Sales Account.
On 31.3.2021, the Trade receivables balance stood at Rs.75,000 which included Rs.6,500 goods sent on

The Copyright of these notes is with CA. Nitin Goel

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 - Rs. 3,900 and Mr. Bakkiram - Rs. 2,600.
Mr. Adhitya sent intimation of acceptance on 25th April and Mr. Bakkiram returned the goods on 15th
April, 2021.

Make the adjustment entries and show how these items will appear in the Balance Sheet on 31st March,
2021. Show also the entries to be made during April, 2021. Value of closing Inventories as on 31st
March, 2021 was Rs.50,000.

Solution
Journal Entries
Date Particulars L.F. Dr. Cr.
Sales A/c Dr. 6,500
To Trade receivables A/c 6,500
31.03.21
(Being the cancellation of original entry of sale in
respect of goods on sale or return basis)
Stock with Customers A/c Dr. 5,000
31.03.21 To Trading A/c (Note 1) 5,000
(Being inventories with customers recorded at cost)
Trade Receivables A/c Dr. 3,900
To Sales A/c 3,900
25.04.21
(Being the goods sent to customers on sale or return
basis in last financial year has been accepted)

Balance Sheet of A & Co. as on 31st March, 2021 (Extracts)

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, 2021 for goods returned by Mr. Bakkiram. Goods should be
included physically in the Inventories-in-trade.

ACCOUNTING TREATMENT WHEN SALE OF GOODS ON APPROVAL OR RETURN BASIS ARE

FREQUENTLY DONE.
When Sale or Return transactions are very frequent, but not numerous, a separate Register/Day Book
called “Sale or Return Journal” is maintained. The format of this Register is as under ─

Goods sent on approval Goods Returned Goods Approved Balance

1 2 3 4 5 6 7 8 9 10 11 12 13
Date Particulars LF Amount Date Particulars LF Amount Date Particulars LF Amt Amount

No entry in Financial Books No entry in Financial Books Recorded as Sales Treated

as Stock

The Copyright of these notes is with CA. Nitin Goel

 Transaction Treatment
Goods dispatched ➢ No entry in Financial Books.
to Customers ➢ Record the dispatch in Columns 1 to 4 of the above Journal.
Goods returned by ➢ No entry in Financial Books.
Customers ➢ Record the return in Columns 5 to 8 of the above Journal.
Goods approved by ➢ Record the approval in Columns 9 to 12 of the above Journal.
Customers ➢ Record as Sales, by the following Journal Entry─
Sundry Debtors A/c Dr. (At Selling Price)
To Sales A/c (At Selling Price)
Stock at end of the ➢ Recorded as Closing Stock (Column 13), by the following Journal Entry─
period Stock with Customers A/c Dr. (At lower of Cost or NRV)
To Trading Account

ACCOUNTING TREATMENT WHEN TRANSACTIONS RELATING TO SALE OF GOODS ON

APPROVAL OR RETURN BASIS FREQUENT AND NUMEROUS
1. When Sale on Approval or Return transactions are frequent and numerous, there is a need to ensure
proper control over the Sale or Return transactions. For this purpose, the Firm maintains ─
(a) Sale or return Day Book.
(b) Sale or Return Ledger ─ containing the Ledger Accounts of Customers to whom goods are sent.
2. This Day Book & Ledger are Memorandum Books. They do not form part of the regular financial
books.
3. The accounting process is explained below ─

The Copyright of these notes is with CA. Nitin Goel

 Transaction Entry in
Sale or Return Day Sale or Return Ledger Financial Books, i.e.
Book Regular General Ledger
Goods Record the despatch Customer A/c Dr. No Entry in Financial
despatched to in Columns 1 to 4 of To Sale or Return A/c Books.
Customers the S/R Day Book. (Entry made at Selling Price)
Goods returned Record the return in Sale or Return A/c Dr. No Entry in Financial
by Customers Columns 5 to 8 of To Customer A/c Books
the S/R Day Book. (Entry made at Selling Price)
Goods approved Record the approval Sale or Return A/c Dr. Customer A/c Dr.
by Customers in Columns 9 to 12 To Customer A/c To Sales A/c
(See Note below) of S/R Day Book. (Entry made at Selling Price) (Entry made at Selling
Price)
Stock at end of the Column 13 denotes Balance in Sale or Return A/c Stock with Customers Dr.
period Stock at Sale Price. is the value of Stock with To Trading A/c
Customers, at Sale Price. (Entry made at Cost or
NRV, whichever is lower)
Note: When goods are approved by customers, the earlier memorandum Sale entry in Sale or return
Ledger is reversed, and the regular Sales Entry is recorded in the Financial Books.

Question 4
A firm sends goods on “Sale or Return basis”. Customers have the choice of returning the goods within a
month. During May 2021, the following are the details of goods sent:
Date (May) 2 8 12 18 20 27
Customers P B Q D E R
Value (Rs.) 17,000 22,000 25,000 5,500 2,000 28,000

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-Q for Sale or Return Account
as on 15th June 2021.

Solution

Dr. Sale or Return Account Cr.

Date Particulars Amount Date Particulars Amount
2021 2021
May,31 To Sundries : Sales 29,500 May,31 By Sundries (Goods sent 99,500
on sale or return basis)
June,15 To Sundries : Returned 42,000
June,15 To Balance c/d 28,000
99,500 99,500
June 16 By Balance b/d 28,000

Dr. Q’s Account Cr.

Date Particulars Amount Date Particulars Amount
2021 2021
May,31 To Sale or Return A/c 25,000 June,15 By Sale or Return A/c 25,000
25,000 25,000

The Copyright of these notes is with CA. Nitin Goel

 SALE OF GOODS ON
APPROVAL OR RETURN BASIS

Q.1 to 5: Indicate whether following statement is true or false:

1. A delivered a horse to Don the condition ‘sale or return within 8 days’.
The horse died within 8 days. The loss will be borne by D.

(a) True (b) False

2. K delivered some jewellery to W on sale or RETURN W pledged it with
A. W is deemed to have accepted the jewellery.
(a) True (b) False

3. Goods sent on approval are treated as sale on despatch of’ goods.

(a) True (b) False
4. When goods sent on approval are returned, an entry is made in the Sales
Return Book.
(a) True (b) False
5. At the year end, our goods lying with the customer on approval will be
included in our closing stock.

(a) True (b) False

Q.6 to 9 : Indicate the correct answer:
6. When goods are sold on approval basis, the buyer has an option to -

(a) Either accept the goods or return the goods within 6 months
(b) Either accept the goods or return the goods within a fixed period

4
(c) Either accept the goods or return the goods without any time
limit
(d) Either accept the goods or destroy the goods within a fixed period

SALE OF GOODS ON APPROVAL OR RETURN BASIS 99

7. When goods are sold on approval basis, the ownership in the goods is transferred to the buyer
when -

(a) The goods are sent by the seller

(b) The goods are received by the buyer

(c) The buyer informs the seller his decision to accept and retain the goods

(d) The payment is made by the buyer

8. When goods are sold on approval basis, the ownership in the goods is deemed to he transferred
to the buyer if-
(a) the buyer fails to pay for the goods within the stipulated period
(b) the buyer fails to return the goods within 6 months
(c) the buyer fails to return the goods within the stipulated period

(d) the buyer fails to return the goods within the I week
9. Goods are delivered by A to B on sale or return basis. They are further sent by B to C and by C
to D on similar terms. The goods are stolen while in the custody of D.
(a) D is bound to pay the price to C; C to B and B to A
(b) C is bound to pay the price to B and B to A
(c) Only B is bound to pay the price to A
(d) Only D is bound to pay the price to C
Q.10 to 15: (Recorded as Normal Sales) : On 1-12-2005 A sent some goods costing ` 3,500 at a
profit of 25% on sales to B on sales or return basis. On 3-12-2005, B returned goods costing ` 800.
At the end of the accounting year i.e. on 31-12-2005, the remaining goods were neither returned
nor approved by B. A records goods on approval as normal sales :

10. On 1-12-2005, when goods are sent by A to B, in the books of A

(a) No entry will be passed by A
(b) B Dr. 4,667

To Sales 4,667
(c) B Dr. 3,500

To Sales 3,500

(d) B Dr. 4,375

To Sales 4,375

100 FUNDAMENTALS OF ACCOUNTING (CPT)

11. On 3-12-2005, when goods are returned, in the books of A
(a) No entry will he passed by A
(b) Sales Dr. 800
To B 800
(c) Sales Dr. 1,067
To B 1,067
(d) Sales Dr. 1,000
To B 1.000
12. On 3 1-12-2005, for goods sent but not yet approved, in the books of A
(a) Sales Dr. 4,667
To Debtors Suspense 4,667
(b) Sales Dr. 3,600
To Debtors Suspense 3,600
(c) Sales Dr. 3,500
To Debtors 3,500
(d) Sales Suspense Dr. 4.375
To Debtors 4,375
13. On 3 1-12-2005, for goods sent but not yet approved and lying with B, in the books of A
(a) Closing Stock Dr. 2,700
To Trading A/c 2,700
(b) Stock on approval Dr. 3,500
To Trading A/c 3,500
(c) Stock on approval Dr. 2,700
To Trading A/c 2,700
(d) Trading A/c Dr. 2,700
To Stock on approval A/c 2,700
14. On 3 1 -12-2005, for goods sent hut not yet approved, in the balance sheet of A
(a) ` 3,600 will he added to the Sundry Debtors
(b) ` 3,600 will be added to the Sundry Creditors
(c) ` 3,600 will he deducted from the Sundry Debtors
(d) ` 3,500 will be deducted from the Sundry Debtors
SALE OF GOODS ON APPROVAL OR RETURN BASIS 101
15. On 31-12-2005, for goods sent but not yet approved and lying with B in the balance sheet of A
(a) ` 2,700 will be added to closing stock
(b) ` 3,500 will be added to closing stock
(c) ` 2,700 will be deducted from closing stock
(d) ` 3,500 will be deducted from closing stock
Q. 16 to 18 : Mr. A, a trader, dispatched goods costing ` 16.000 to his customer Mr. B on sale or
return basis after charging a gross profit of 25% on cost. Mr. A had treated the transaction as
credit sale at the time of dispatch of the goods.
In the Books of Mr. A
Journal Entries
No. Particulars Dr. ` Cr. `
1. Mr. B’s A/c Dr. 20,000
To Sales A/c 20,000
2. No Entry
3. Sales A/c Dr. 20,000
To Mr. B’s A/c 20,000
4. Sales A/c Dr. 10,000
To Mr. B’sA/c 10,000
Select the right combination of journal entries in the books of Mr.A, in the following alternative
cases.
16. Case 1: The customer had approved the good.
(a) Entry 1 & 2 (b) Entry 1 & 3
(c) Entry 1 & 4 (d) Entry 2 & 3
17. Case 2 : The customer had rejected all the goods
(a) Entry 1 & 2 (b) Entry 1 & 3
(c) Entry 1 & 4 (d) None of these
18. Case 3 : The Customer had retained half of the goods while rejecting the other half.
(a) Entry 1 & 2 (b) Entry 1 &3
(c) Entry 1 & 4 (d) None of these
19. On 31st December, 2004 goods sold at a sale of ` 3,000 were lying with customer, Ritu to
whom these goods were sold on ‘sale or return basis’ and recorded as actual sales. No consent
has been received from Ritu. Goods were sent to on approval at a profit of cost plus 20%.
Present market price is 10% less than cost price.

102 FUNDAMENTALS OF ACCOUNTING (CPT)

 The closing stock.
(a) will be shown in the balance sheet of Ritu at ` 3,000.

(b) will be included at ` 3,000 in the balance sheet of the consignor.

(c) will be included at 2,250 in the balance sheet of the consignor.

(d) will be included at ` 2,500 in the balance sheet of the consigner.

Q.20 to 23: (Recorded in Manorandum Sale or Return Book) : A Ltd. sent out motor cars on
sale or return basis. During April, the following transaction occured :(Recorded in Memorandum
Sale or Return Book):

Date Particulars ` Date Particulars

2 To Y 10,000 7 Returned

16 ToX 15,000 20 Retained

20 To Y 16,000 25 Returned

28 To Y 20,000 No returns nor any intimation

20. The total shown under Goods Sent Out Column of the Memorandum Sale or Return Book is
(a) ` 10,000 (b) ` 61,000 (c) ` 26,000 (d) ` 35,000

21. The total shown under Goods Sold Column of the Memorandum Sale or Return Book is
(a) ` 15,000 (b) ` 35,000 (c) ` 61,000 (d) ` 26.000

22. The total shown under Goods Returned Column of the Memorandum Sale or Return Book is
(a) ` 61,000 (b) ` 26,000 (c) ` 15,000 (d) ` 35,000

23. The total shown under Balance Goods Column of the Memorandum Sale or Return Book is
(a) ` 35,000 (b) ` 26,000 (c) ` 61,000 (d) ` 20,000
Q.24 to 27: A sent out goods on approval as follows: (Recorded under Double Entry System):

Mar. 10 X 6,000 Mar. 13 Returned ` 2,000: remaining retained

Mar. 20 Y 4,0000 Mar. 22 Retained all.

Mar. 30 Z 30,000 Mar. 31 No intimation.

24. Total of the Goods Sent on Approval Day Book on 3 1 March is

(a) ` 10,000 (b) ` 38,000 (c) ` 8,000 (d) ` 40,000
25. The balance of Goods on Approval A/c in the Approval Ledger
(a) ` 30,000 (b) `40,000 (c) ` 32,000 (d) ` 38,000

SALE OF GOODS ON APPROVAL OR RETURN BASIS 103

26. The balance in Z’s A/c in the Approval Ledger will
(a) Be a debit balance of ` 30,000 (b) Be a credit balance of ` 30,000

(c) Be Nil (d) Be none of the above

27. The balance of Sales A/c in the General Ledger will be -
(a) ` 40,000 (b) ` 8,000 (c) ` 38,000 (d) ` 30,000
Q.28 to 29: [Goods on Sale or Return- Stock verifled after goods sent but before year-end] Closing
Stock was physically verified on 31st March, 2006 and was valued at ` 2,00,000. Goods are
normally sold at a profit of 25% on cost. On 21st March, 2006 goods having sale value of `
1,00,000 were sent on sale or return basis to a customer. The period of approval was two
weeks. Indicate the value of the closing stock to be taken to the balance sheet as on 31-3-2006 in
each of the following alternative cases.
28. There was no communication from the customer.
(a) ` 2,00,000 (b) ` 2,80,000 (c) ` 3,00,000 (d) ` 1,80,000
29. The customer returned 20% of the goods on 31st March, 2006.
(a) ` 2,00,000 (b) ` 2,80,000 (c) ` 2,16,000 (d) ` 2,642000
30. The customer approved 80% of the goods on 31st March, 2006.
(a) ` 2,16,000 (b) ` 2,80,000 (c) ` 3,00,000 (d) ` 1,80,000
31. The customer returned 20% of the goods and approved the balance on 31st March, 2006.
(a) ` 2,16,000 (b) ` 2,80,000 (c) ` 3,00,000 (d) ` 1,80,000

32. The customer returned 20% of the goods approved 80% of the remaining goods on 31st March.
2006.
(a) ` 2,16,000 (b) ` 2,12,800 (c) ` 2,00,000 (d) ` 2,28,800

33. When a large number of articles are sent on a sale or return basis, it is necessary to maintain
(a) Sale journal (b) Goods returned journal
(c) Sale or return journal (d) None of the above.
34. On 31st December, 2005 goods sold at a sale price of ` 30,000 were lying with customer, Mohan
to whom these goods were sold on ‘sale or return basis’ and recorded as actual sales. Since no
consent was received from Mohan, the adjustment entry was made presuming goods were
sent on approval at a profit of cost plus 20%. In the balance sheet, the stock with customers
account will be shown at `
(a) 30,000 (b) 24,000 (c) 20,000 (d) 25,000

104 FUNDAMENTALS OF ACCOUNTING (CPT)

35. 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, 2005,
the remaining goods were neither returned nor were approved by him. The stock on approval
will be shown in the balance sheet at `
(a) 2,000. (b) 2,700

(c) 2,700 less 25% of 2,700. (d) 3,500

36. 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 31-12-2005,
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 stock on
approval will be amounting
(a) ` 16,000 (b) ` 20,000 (c) ` 15,000 (d) None of the above
37. Umesh sends goods on approval basis as follows:
Date Customer’s Name Sale price of Goods Accepted Goods
January, 2006 Goods Sent ` Returned
` `
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 stock of goods sent on approval basis on 31st January will be
(a) ` 500 (b) Nil (c) ` 260 (d) None of the above
38. 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 (d) None of the above
39. 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 stock 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. (d) None of the above.

SALE OF GOODS ON APPROVAL OR RETURN BASIS 105

40. 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.
41. 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
(c) Approval sale and no entry is passed
(d) None of the above
42. 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 (b) Entry for return of goods is passed

return of goods by the seller

(c) Only the stock account will (d) None of the above

be adjusted

43. Which of the following is not a main column of sales or return journal?

(a) goods sent on approval column (b) goods returned column

(c) goods approved column (d) purchase column

44. Sale or Return Day Book and Sale or Return Ledger are known as

(a) principal books (b) subsidiary books

(c) memorandum books (d) none of the above

45. In the Sale or Return Ledger

(a) 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.

(b) all the Customers are debited in total and the sale or return account is credited with the
periodical total of the Sale or Return Day Book.

(c) an the customers are individually debited and the sale or return account is also credited
with the individual total of the Sale or Return Day Book.

(d) None of the above.

106 FUNDAMENTALS OF ACCOUNTING (CPT)

46. When the goods are returned by the customers within the specified time, they are recorded

(a) initially in the Sale or Return Ledger. Thereafter, in the Sale or Return Day Book

(b) initially in the Sale or Return Day Book. Thereafter, in the Sale or Return Ledger

(c) only in the Sale Or Return Day Book ,

(d) only in the Sale or Return Ledger

***********

SALE OF GOODS ON APPROVAL OR RETURN BASIS 107

 HOME WORK - 1

1. Under sales on returned 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
(c) Approval sale and no entry is passed
(d) None of these
2. Under Sales on Return or approval basis when the transactions are few and the seller sends
the goods on approval or return basis, the accounting treatment will be—
(a) No Journal Entry (b) Entry in Sales or Return Journal
(c) Entry in Sales or Return Day Book (d) Sundry Debtors A/c Dr.
To Sales A/c
3. Under Sales or Return or approval basis when the transactions are moderate and the seller
sends the goods on approval or return basis, the accounting treatment will be—
(a) No Journal Entry (b) Entry in Sales or Return Journal
(c) Entry in Sales or Return Day Book (d) Sundry Debtors A/c Dr.
To Sales A/c
4. Under Sales on Return or approval basis when the transaction are large and the seller sends the
goods on approval or return basis, the accounting treatment will be—
(a) No Journal Entry (b) Entry in Sales or Return Journal
(c) Entry in Sales or Return Day Book (d) Sundry Debtors A/c Dr.
To Sales A/c
5. Under Sales on Return or approval basis when the transaction are few and the he customer
accepts the goods, the accounting treatment will be—
(a) No Journal Entry (b) Entry in Sales or Return Journal
(c) Entry in Sales or Return Day Book (d) Sundry Debtors A/c Dr.
To Sales A/c

108 FUNDAMENTALS OF ACCOUNTING (CPT)

6. 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 stock account will be adjusted
(d) None of these.
7. Which of the following is not amain column of sales or return journal?
(a) goods sent on approval column (b) goods returned column
(c) goods approved column (d) purchase column
8. When Sales or Return Journal is maintained, a journal entry is passed for:
(a) Goods delivered (b) Goods returned
(c) Goods approved (d) None of these
9. Sale or Return Day Book and Sale or Return Ledger are Known as
(a) principal books (b) subsidiary books
(c) memorandum books (d) None of these
10. In the Sale or Return Ledger
(a) All the customers are individually debited and the sale or return account is credited M$
the periodical total of the Sale or Return Day Book.
(b) all the customers are debited in total and the sale or return account is credited with
periodical total of the Sale or Return Day Book.
(c) all the customers are individually debited and the sale or returned account is also credited
with the individual total of the Sale or Return Day Book.
(d) None of these.
11. When Sale or Return Day Book and Sale or Return Ledger are maintained and the goods sent
to the customers on sale or return basis, these are recorded:
(a) Initially in the Sale or Return Day Book. Thereafter in the Sale or Return Ledger.
(b) Only in the Sales or Return Day Book.
(c) Only in the Sales Day Book.
(d) Both in Sales or Return Day Book and Sales Day Book

SALE OF GOODS ON APPROVAL OR RETURN BASIS 109

12. When the goods are returned by the customers within the specified time, they are recorded
(a) initially in the Sale or Returned Ledger. Thereafter, in the Sale or Returned Day Book.
(b) initially in the Sale or Returned Day Book. Thereafter, in the Sale or Returned Ledger.
(c) only in the Sale or Returned Day Book.
(d) only in the Sale or Returned Ledger.

ANSWER KEYS

110 FUNDAMENTALS OF ACCOUNTING (CPT)

 HOME WORK - 2

1. Sales for the year ended 31st March, 2005 amounted to ` 10,00,000. Sales included goods sold
to Mr. A for ` 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the
buyer’s risk. Therefore, such goods should be treated as part of
(a) Sales (b) Closing stock (c) Goods in transit (d) Sales return
2. Y Ltd. sends out its goods ` 1,20,000 to one of its dealer on Sale or Return basis. On 31st March
he received an approval letter for goods of ` 80,000. Y Ltd. charge 25% profit on cost. The cost
price of the un-approved goods with the dealer will be
(a) ` 32,000 (b) ` 40,000 (c) ` 80,000 (d) ` 64,000
3. 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 stock 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 (d) None of the above.
4. ABC Ltd. sells goods to its approved customers on sale or return basis at a profit of 20% on
sales, treating as actual sales. On 26th March, 2006 goods costing `10,000 were sent to Annu
Ltd. No confirmation has been received from Annu Ltd. till 31st March, 2006. The amount of
stock with customers to be shown as closing stock in the balance sheet of ABC Ltd. as on 31st
March, 2006 will be
(a) ` 12,500 (b) ` 8,000 (c) ` 10,000 (d) Nil
5. Varun Ltd. sends goods to his customers on Sale or Return recording it as a sale at the time of
sending it for approval. During 2006, Varun Ltd. send goods to customers for `1,00,000 on sale
or return basis, at cost plus 33.33%. On September 2006. a letter of approval was received from
a customer for ` 40,000. In this respect, entry will be
(a) Debtors account debited and sales account credited with `40,000.

(b) Sales account debited and debtors account credited with `40,000.

(c) No entry is required for receiving the letter of approval from the customer.

(d) Entry will be made at the end of the year.

SALE OF GOODS ON APPROVAL OR RETURN BASIS 111

6. 100 articles at the sale price of ` 200 each sent to a customer on approval basis were recorded
as actual sales and that price. The sale price was made it cost plus 25%. The amount of stock on
approval will be amounting
(a) ` 16,000 (b) ` 20,000 (c) ` 15,000 (d) None of the above
7. A ___________ is sent to a customer when he returns goods
(a) Debit note (b) Credit note
(c) Proforma invoice (d) None of the above
8. Following are the sales return of Jindal & Co. a saree dealer
Date Credit Note
05.01.206 201 Goyal & Co. Rampur returned
2 Polyster sarees @ 125
10.01.2006 202 Accepted return of goods (which were sold for cash)
from Garf & Co. Bhiwani, 2 Kota Sarees @ ` 50
17.01.2006 203 Mittal & Co. Hissar returned 2 silk sarees @ ` 325
31.01.2006 Mohan returned one old type writer @ ` 500
Total of sarees return book will be
(a) ` 900 (b) ` 800 (c) ` 1000 (d) None of the three
9. Goods of ` 600 (sales price) sent on sale on approval basis were included in the sales book. The
profit included in the sales was 20% on cost. Stock with the party will increase closing stock by
________
(a) ` 600 (b) ` 500 (c) ` 400 (d) None of the three
10. Included in the sales were sale of goods of ` 5000 on “Sale on approval” basis for which
consent of the customer was not received upto Dec. 31st. Goods sent on approval included
profits at 25% on cost. Stock on approval will be
(a) ` 4500 (b) ` 5000 (c) ` 4000 (d) None of the three
11. At what price goods pending approval or return as on the last day of accounting year are
valued
(a) Cost price (b) Selling price (c) Average price (d) Latest price
12. Goods sold ` 25,000 on approval or return basis were included in Sales Book. The profit included
in the sales was at 25% on cost. At the year end, closing stock will increase by
(a) ` 5,000 (b) ` 20,000 (c) ` 15,000 (d) ` 45,000

*********
112 FUNDAMENTALS OF ACCOUNTING (CPT)
 Answer keys

1 (a) 7 (b)
2 (a) 8 (a)
3 (c) 9 (b)
4 (c) 10 (c)
5 (c) 11 (a)

6 (a) 12 (b)

SALE OF GOODS ON APPROVAL OR RETURN BASIS 113

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888
CH - 4

GOODS SENT ON APPROVAL BASIS

DANGAL QUESTIONS

ICAI RTP QUESTIONS ICAI PAST QUESTIONS TOTAL QUESTIONS

3 5 8

4.1 | P a g e FACULTY:CA PRATIK NAHTA

NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

4.2 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Lets DANGAL with ICAI RTP QUESTIONS

MAY 2018

Q1> X supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of dispatch Party’s name Amount Rs. 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 Rs. 2,000 returned on 20.12.2017

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

ANS. In the books of ‘X’

Goods on sales or return, sold and returned day book

4.3 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Goods on Sales or Return Total Account

MAY 2019

Q2> On 31st December, 2018 goods sold at a sale price ofRs. 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.

ANS. Journal Entries

4.4 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Working Note:

Calculation of cost and market price of Inventories with customer

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

MAY 2020

Q3> 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 Rs. 75,000 which included Rs. 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 Rs. 3,900 and Mr. Bakkiram Rs. 2,600.

Mr. Adhitya sent intimation of acceptance on 25th 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 Rs. 50,000. (ICAI Exams Nov 2018)

ANS In the Books of Mr. Ganesh

4.5 | P a g e FACULTY:CA PRATIK NAHTA

NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Journal Entries

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

Notes:

(1) Cost of goods lying with customers = 100/130 x Rs. 6,500 = Rs. 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.

4.6 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Let’s DANGAL with ICAI PAST EXAMS QUESTIONS

Q1> M/s Metha Bros, sends out goods on approval as follows:

January 10. A – Rs. 300 January 13. A returned Rs. 100 rest retained.

January 12. B – Rs. 200 January 22. B retained all the goods.

January 30. C- Rs. 1,500 January 31. No intimation.

Show how these transactions will appear when books are kept on double entry system. Give Journal

entries and ledger accounts.

Sol : JOURNAL OF M/S MEHTA BROS.

Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
Jan. 10 As A/c Dr. 300
To Sale or Return A/c 300
[Being goods sent on approval to ‘A’ entered in sale or return ledger]
Jan. 12 B’s A/c Dr. 200
To Sale or Return A/c 200
[Being goods sent to B on approval entered in Sale or Return ledger]
Jan. 13 Sale or Return A/c Dr. 100
ToA’s A/c 100
[Being goods returned by A entered in Sale or Return Ledger]
Jan. 13 A’s A/c (in main ledger) Dr. 200
To A (in Sale or Return Leger) 200
[Being goods approved transferred to Personal A/c in the main ledger]
Jan. 13 Sale or Return A/c Dr. 200
To Sales A/c (in main ledger) 200
[Being goods approved transferred from Sale or Return ledger to main
ledger]
Jan. 22 B’s A/c (in main ledger) Dr. 200 200
To B (in Sale or Return ledger)
[Being goods approved transferred to Personal A/c in the main ledger]
Jan. 22 Sale or Return A/c (in Sale or Return ledger) Dr. 200

4.7 | P a g e FACULTY:CA PRATIK NAHTA

NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

To Sales A/c (in main ledger) 200

[Being goods approved transferred from Sale or Return ledger to main
ledger]
Jan. 30 C’s A/c Dr. 1,500
To Sale or Return A/c 1,500
[Being goods sent on approval to C entered in Sale or Return ledger]

Step 1: Recording in the books

SALE OR RETURN DAY BOOK

Date Customer’s Name Sale or Return (L.F) Amount (Rs.)
Jan. 10 A 300
Jan. 12 B 200
Jan. 30 C 1,500
2,000

SALES AND RETURNS BOOK

Goods Sold Goods Returned
Date Customer’s Regular Sale or Date Customer’s Sale or Rs.
Name L.F Return L.F Name Return
L.F.
Jan. 13 A 200 Jan. 13 A 100
Jan. 22 B 200

Step 2: Posting to Sales or Returns Ledger.

A’S ACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan. 10 To Sale or Return A/c 300 Jan. 13 By A’s A/c (in main 200
ledger)
By Sale or Return A/c 100
300 300

B’S ACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan. 12 To Sale or Return A/c 200 Jan. 22 By B’s A/c (in main 200
200 ledger) 200

4.8 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

C’S ACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan. 30 To Sale or Return A/c 1,500 Jan. 31 By Balance c/d 1,500
1,500 1,500

SALE OR RETURN ACCOUNT

Date Particulars Rs. Date Particulars Rs.
Jan. 13 ToA’s A/c (returns) 100 Jan. 10 By A’s A/c 300
Jan. 13 To Sales A/c (in main Jan. 12 By B’s A/c 200
ledger) 200
Jan. 22 To Sales A/c (in main
ledger) 200
Jan. 31 To Balance c/d 1,500 Jan. 30 By C’s A/c 1,500
2,000 2,000

Step 3: Posting to Main Ledger.

A’SACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan. 13 To A (in Sale or Return 200 Jan. 31 By Balance c/d 200
ledger) 200 200

B’S ACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan. 22 To B (in Sale or Return 200 Jan. 31 Balance c/d 200
ledger) 200 200

SALES ACCOUNT
Date Particulars Rs. Date Particulars Rs.
Jan 31 To Balance c/d 400 Jan 13 By Sale or Return A/c 200
(in Sale or Return ledger)
Jan 22 By Sale or Return A/c 200
(in Sale or Return ledger)
400 400

Q2> On 31 -12-2018 goods sold at sales price of Rs. 3,000 were lying with customer Anu to whom they were

4.9 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

sold on ‘Sale or Return’ basis and recorded as actual sales. Since no consent has been received from the

customer, 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.

Sol: JOURNAL OF ANU

Date Particulars Dr. (Rs.) Cr. (Rs.)
Dec. 31 Sales A/c Dr. 3,000
To Anu’s A/c 3,000
[Being cancellation of sale entry for goods not yet approved]
Stock with customers A/c Dr. 2,250
To Trading A/c 2,250
[Being stock with customers recorded at Market price]

Working Note: Calculation of Cost and Market Price of Stock with customer
A. Sale price of goods sent on approval Rs. 3,000
B. Less: Profit [3,000 x 20/120] 500
C. Cost of goods 2,500
D. Market price = 2,500 – (2,500 x 10%) = 2,250

Note: Since the market price is less than the cost price, stock with customer is valued at market price

Q3> Ramu sells goods to his approved customers on ‘Sale or Return’ basis at a profit of 20% on sales,

treating as actual sales. On 15th December, goods costing Rs. 1,000 were sent to Usha Traders. No

confirmation has been received from Usha Traders until 31st December.

Give the necessary journal entries in the books of Ramu.

Sol: JOURNAL
Date Particulars Dr. (Rs.) Cr. (Rs.)
15th Usha Traders A/c Dr. 1,250
Dec. To Sales A/c 1,250
(Being the sales made with sale value of Rs. 1,250 (cost = 1,000 +
Profit 20% on sales (25% on cost – 1000 x 25/100))]
31st Sales A/c Dr 1,250
Dec. To Usha traders 1,250
(Being the cancellation of sale recorded earlier)

4.10 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

31st Stock with customers A/c Dr. 1,000

Dec. To Trading A/c 1,000
(Being stock at the end recorded with the customers at cost price)

Q4> Mr. Badhri sends goods to his customers on Sale or Return. The following transactions took place

during the month of December 2017. (May 2018)

December 2nd– Sent goods to customers on sale or return basis at cost plus 25% - Rs. 80,000

December 10th– Goods returned by customers Rs. 35,000

December 17th– Received letters from customers for approval Rs. 35,000

December 23rd– Goods with customers awaiting approval Rs. 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.

Sol: In the books of Mr. Badhri Journal Entries

4.11 | P a g e FACULTY:CA PRATIK NAHTA

 NAHTA PROFESSIONAL CLASSES M:8878819888 / 8518819888

Note:(1) Alternatively, Sales account or Sales returns can be debited in place of Return Inwards a/c.

(2) No entry is required for receiving letter of approval from customer.

(3) Cost of goods with customers = Rs. 15,000 x 100/125 = Rs. 12,000

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

Q5> A firm sends good on "Sale or Return basis. Customers have the choice of returning the goods within a

month. During May 2018, the following are the details of goods sent: (Nov 2019)

Date (May) 2 8 12 18 20 27
Customers P B Q D E R
Value (Rs) 17,000 22,000 25,000 5,500 2,000 28,000

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 Q for Sale or Return Account

as on 15th June 2019

SOL.: Sale or Return Account

Q’s Account

4.12 | P a g e FACULTY:CA PRATIK NAHTA