Sale on Approval

Sale on Approval

In some wholesale trade, it is usual to send goods by manufacturers (or wholesaler) to retailer. The retailer keeps the goods on approval basis. This is just transfer of possession of goods and not sale. The property in goods do not pass to the retailer. The retailer then either approves the goods, or retails the goods (in that case it becomes a sale by wholesaler / manufacturer to Retailer), or return the goods.

In some retails trade also, trade (like Books, fashion items) it is usual practice to sell the goods to the customers with the option to return within a specified time (or a reasonable time) if not accepted. Technically, it is not a sale, but simply transfer of possession of goods to customer. Such delivery of goods  becomes sale only when the customer approves the goods or retains the goods beyond the specified time (or a reasonable time). This type of sale is known as “Sale on Approval” (SOA) or “Sale on Return” basis (SOR).

Accounting Procedures

There are 2 methods of accounting of Sale on Approval.

  • Delivery Considered as Sale : In organisations where such type of sale is casual, they normally consider Delivery as sale. So, a Sale entry is recorded at the time of delivery. If the party returns the gods unaccepted, sale is reversed (a reverse sale entry, i.e sale Return) is recorded.
  • Sale considered on approval : However, in organisations where Sale on Return is almost a regular practice, the delivery is not accounted for (to avoid numerous delivery and returns transactions entries), but is kept in a memorandum record. If the goods are approved or retained by the customer, it is treated as Sale

Delivery recorded as Sale

In such case, Sale is accounted for on Delivery. When the goods are returned without being accepted by the customer, the sale entry is reversed. The system is simple.

 On delivery of goods Debtors A/c Dr   To Sales A/c.On Return of Goods Sales A/c  Dr    To DebtorsOn receipt of money from Debtor Cash / Bank A/c Dr    To Debtor

At the end of year, in respect of goods still lying with customers on approval, the following entry is to be made, to account for the stock lying unsold with the customers.

Sales A/c  Dr    To Debtors  Stock with Customers A/c To Trading A/c (Cost of goods)

Sale approved at different rate than original invoice price

Sometimes, the Rate at which the sale is approved, may be different from the rate at which the invoice was originally made at the time of delivery of the goods. In such case, a Journal entry for the price difference is to be made.

If the Sale is made at higher price than the invoice Price

Debtor A/c Dr

Sales A/c Cr

(by the amount of difference from approved sale price and the original invoice price)

If the Sale is made at lower price than the invoice Price

Sale A/c Dr

Debtor  A/c Cr

(by the amount of difference from approved sale price and the original invoice price)

Delivery recorded as Sale – Problems

Sale Accounted on Delivery

A merchant casually sells goods on “Sale or Return Basis”. On 29th Dec, goods costing Rs.10,000 were sent to X at 25% profit on cost. The merchant treated the transaction as credit sale at the time of dispatch of goods but the approval is still pending till 31st Dec. On 31st Dec, Stock in hand Rs.50,000 and Sundry Debtors stood Rs.1,00,000 (including X). Show the effect on Balance Sheet.

Sale value of goods delivered = 10000+ (25% of 10000)=10000+2500=12500

Accounting entries

29.12.15 X Dr 12500   To Sale 12500 (Delivery of goods on SOA to X costing 10000 on 25% profit on cost)31.12.15 Sale A/c Dr 12500   To X 12500 Sale reversed as approval of X, not received31.12.15 Stock with Customer  Dr 10,000  To Trading A/c  10,000 (Cos of stock lying with X)


Balance Sheet (Extracts) as on 31.12.2015

Sundry Debtors1,00,000 
Less: Debtors on approval12,50087,500
Stock in hand50,000 
Add: Stock  with customer10,00060,000

Sale recorded on approval only

Sale recorded on approval

Under such circumstances, a separate book called “Sales or return day book”, is used where a memorandum record is maintained, to keep track of goods delivered / returned.

  • Delivery of goods on approval: An entry is made in Memorandum book but no accounting entry is made
  • Goods Returned by Customer : A note is made against the delivery entry but no accounting entry is made
  • Approval by Customer : When goods are approved by customers (or not retuned beyond stipulated date), it is recorded as Sale

Debtors A/c Dr

     To Sales A/c.

  • Unapproved Stock lying with customer at year end : Stock lying with the customer pending approval is found out from the Register and an accounting entry is made thereof

Goods on Approval A/c  Dr

To Trading A/c. (Cost Price)

Sale on Approval – Problems

Sale recorded on deemed Retain

 ‘X’ supplied goods on sale or return basis to customers, on the condition that Goods are to be returned within 15 days from the date of dispatch, failing which it will be treated as sales. The books are closed on the 31st December, 2015.The respective accounting entry in respect of each transaction is shown in the last column of the following table, in which deliveries, returns and sales are recorded.

Delivery DatePartyRsStatusAccounting Entries
10.12.2015ABC10,000No information till 31.12.201525.12.15 ABC Dr  10,000  To Sale       10,000 (treated as Sale)
12.12.2015DEF15,000Returned on 16.12.2015No entry. Returns noted as memorandum
15.12.2015GHI12,000Goods worth Rs.2,000 Returned on 20.12.201530.12.15 GHI Dr 10000      To Sale    10000 (good retained 12000-2000, treated as sale
20.12.2015DEF16,000Goods Retained on 24.12.201524.12.15 DEF Dr 16000 To Sale    16000 (Goods approved)
25.12.2015ABC11,000Goods Retained on 28.12.201528.12.15 ABC Dr 11000 To Sale    11000 (Goods approved)
30.12.2015GHI13,000 (cost price  11500)No information till 31.12.2015Stock with Customer Dr 11500 To Trading A/c                  11500

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