Accounting Notes Part II

Accounting Notes Part II

First Published on 8 February 2016

In the First Part, I have explained some conceptual points. Will continue in this part with some other points.

POINT OF TIME OF SALE AND PURCHASE

At what point of time a sale should be recognized is a matter of full-fledged debate and it continues. In the simplest form, when an invoice is issued, a sale is recorded and the buyer has to record the purchase. There is no confusion when this is happening off the counter, with both seller and purchaser face to face dealing, paying, and handing over the goods. But what is the underlying principle?

Sale has to be recorded at the time when the property in the goods is transferred by the seller and purchase is recorded when the property in goods is rested with the purchaser.

PROPERTY IN THE GOODS

Property in the goods is the right of the person over the goods to own, deal with it, and do anything with it and is coupled with the bearing of risk of loss in the goods. The point of passing the property in the goods is what matters in the recording of sales and purchases and it can be recorded notwithstanding the movement of goods. In the cases of goods being possessed by the other party or their representatives, they hold it as agents and the holding has an implied contract of agency of taking care of the goods on behalf of the owner.

Examples of different points of time when the property in the goods passes can be enumerated, surely not exhaustively, as under:

• In the case of across the counter sales or where the seller takes it on his own to deliver the product to the customer and bills including the transportation cost, that is the order is booked for door delivery, the sales are when the customer receives the goods. 
• In the case of other than the counter sale or simple COD sales, the agreement between the parties or the practices of the trade comes in to play and decide the time of sales.
• In the case prices are decided ex-works and the customer is responsible for all transportation as also marine insurance, the sales are done when the goods leave the godown of the seller into the hands of the transporter acting as an agent of the buyer. 
• In such cases, while the seller will credit sales and note the exit of stock, the purchaser will debit the sale but will not take the stock in his godown till it reaches his premises but will show it as 'Stock in Transit' in his books in closing stock.
• In the case of any international sales also, it depends on who is taking the risk of loss during transit to decide the point of sales. The point when the seller ceases to bear the risk is the point of sales. At that point in time, he normally asks the buyer to get the insurance of the goods. 
• In the case of consignment sales, initially, the seller prepares a Goods Transfer Note or such document evidencing the transfer of physical goods / or transfer of rights to manage and sell the goods, but the risk of loss continues with the seller and sales happens only when the consignment agent actually sells the item on behalf of the principal.
• In such case, however, the consignment agent may still insure the goods on his own and that may be stipulated in the agreement but that bearing of risk is part of taking good and prudent care of the goods and not part of the risk of ownership, The two risks are distinguished as the risk of ownership means if the goods remain unsold or suffer damage due to some inherent defect or lapse of time, the loss is suffered by the principal; whereas, if the loss of goods happen due to fire or any such physical mishap or due to mishandling or are lost, then the risk is borne by the agent.
• SOR scheme, (Sale or Return) is different from Consignment sale as in SOR the property in the goods passes to the buyer immediately on billing and he has to raise a returns sale bill on the return of the goods to the seller which can be treated either as a fresh sale or a Sales Return.

Accounting Entries

In the case of sales, Sales is credited and Debtors or Cash/Bank is debited by the realizable value. Trade discount, if any, is not accounted for in financial entries. 

Buyer debits the purchases and credits the Creditors or Cash/Bank,

Returns entries are just the reverse of the above.

Sales and Purchase Account should be credited or debited by the amount net of any indirect taxes which can be passed over to the Government due to VAT regime law.

Short / Excess payment due to cash discount/interest on delayed payments should be taken to Profit and Loss statement under the separate head of account