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How to treat the goods returned in the current year but sold in the previous year in the books of accounts…….Perhaps its a non adjusting event so it will have no effect on previous year’s FS. But how to treat in current years b ooks.
Can anyone elaborate please…….
ThanksIve just noticed that Mikelittle is on line so he might see this and correct me if im wrong! i dont think you have to do anything – its just in the normal course of business so at the end of the year its just deducted from this years sales
Gingergirl – I was just reading natahir’s post when your response came up! Essentially you’re correct – so long as the return actually IS in the normal course of business. Potentially it’s an attempt at manipulation (window dressing) by the selling company to reduce inventory at the year end and increase receivables.
IF an auditor sees this and IF the auditor considers it material, either qualitatively or quantitatively, then the auditor should ask that the directors amend the financial statements to show a true and fair view by treating the amount involved as a NON-ADJUSTING subsequent event in last year’s financial statements (presumably the goods are being returned BEFORE the finalisation of last year’s financial statements)
That treatment would involve disclosing the nature, values and dates of the reversing transaction (the return of apparently fictitious sales)
Thanks for the update…..still I wonder, if deduction from the current yr’s sales will hurt the matching principle……as the revenue was earned in last year and matched against last year costs. It sounds like current yr’s revenue being reduced without corresponding reduction in costs……? Is it ok if we treat this as debit the profit portion to retained earnings and cost portion as addition to stocks….. please explain……
Thanks
Again, it comes down to whether it was an ordinary return in the normal course of business. If it was, then no adjustment should be necessary – presumably the same could well have happened last year so over a period of time, this would all balance out. If you’re going to start messing about with this at the year end, are you also going to make adjustments for each month’s end accounts?
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Dr inventory/Cr cash if it’s returns in the ordinary course of business (if the lower of cost/NRV of the item is less than the cash, there should be Dr P&L as well to account for the impairment). If returning goods is due to some guarantee, or your firm has constructive obligation due to taking defective goods in the past or whatever, there should be a provision (management estimate) as well (in all periods – cr liability/dr P&L, so to match the “correct” expense to revenue in the correct period).
Unless it’s an extraordinary amount (material to the FS), the returns wouldn’t qualify as non-adjusting events, so they wouldn’t even need disclosure. If you provide for returns, that should be disclosed, if material.
Auditors might see it as a problem if they saw huge amounts of sales at the end of December and then returns in January, fraud risk.
Hi Nenor – you seem to have said pretty much everything I have already posted. The only point where we disagree is with your first line, the journal entry. You are aware that inventory appears both as part of the cost of sales calculation and also as an asset on Statement of Financial Position. So your journal entry simply doesn’t work!
Basically, it’s wrong
The original question asked by implication about provisioning at the year end and whether any adjustment was needed for “last year’s financial statements” My answer still holds good. Unless the item was (a) not in the ordinary course of business, (b) could be classed as window-dressing, and (c) is material, then no adjustment is necessary to last year’s financial statements.
The entry to record the return this year is NOT Dr Inventory Cr Cash. The credit entry could be Cash, Receivables or Bank – but I have no argument with reducing an asset with the credit entry.
It’s the debit where you have gone wrong. It should, in fact, be debited to Sales Returns. At the end of the accounting period, Sales Returns will be netted off the Sales / Revenue figure. There will be no entry into an Inventory Account under the traditional method of bookkeeping / accounting as used in the UK. If the accounting system is similar to that used in former Eastern Europe, the debit will be to Cost of Sales
Please, when the return was based on the ordinary course of business and not as a result of window dressing, would it be right to then Dr sales return in the current period for goods sold in the previous period and then offer an explanation to show that although the sales return for the current period is high, however a large amount of the sales return relates to previous period sales? Also, the customer paid cash for the goods in the previous period and has decided to offset bills for goods supplied in the current period with amount returned, how would this affect the current period account?
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