MANAGEMENT ACCOUNTS - 07.01.2011

Sale or return

The search for growth

Top line. Recent surveys have indicated that compared with 2009 and 2010, directors are moving away from a focus on costs to spending more time on obtaining new revenue sources for 2011. The implication being that having achieved all the cost efficiencies you can, your company is now free to work on its top line (sales) knowing that the contribution from new sources of income will flow straight through to the bottom line as profit. Your company has been offered space at retail outlets but on a sale or return (SOR) basis. If it were to take up this offer, what would SOR mean for your company’s revenue recognition/bookkeeping?

What is SOR?

To help the marketing and distribution of certain goods, some manufacturers and distributors make their products available to retailers on an SOR basis. You might be prepared to operate on this basis if you are convinced that your products are so good that, once on display, they will be purchased. If the goods are sold to ultimate customers, the retailer retains a previously agreed proportion of the sales revenue and remits the balance to you. In the event of the goods not being sold, after a previously agreed period, they are returned to you at no charge to the retailer. Naturally, you’ll have to reconsider your pricing practices in order to make profits even if a proportion of your goods are returned. This is particularly the case if you end up paying the shipping costs.

See The next step for an example of what you might add to your existing terms of business in respect of SOR sales.

Accounting treatment

If you sell goods to a customer on an SOR basis (with the customer having the right to return any unsold goods within 30 days), the goods will continue to belong to you (and so be included in your stock figure) until the customer sells them.

Month-end position. However, if based on previous experience, you know that you are likely to sell 60% of the SOR goods after 30 days from issue, you should recognise this in your management accounts. For example, for a £10,000 SOR sale:

Step 1. Raise an SOR invoice: Debit sales ledger (trade debtors) account (B/S) £10,000 and Credit SOR deferred sales provision (B/S) £10,000.

Step 2. To reflect the true position, make an adjustment for the expected sales: Debit SOR deferred sales provision (B/S) £6,000 (100% – 60% = 40% x £10,000) and Credit SOR sales account (P&L) £6,000 – this will be the amount shown as sales in your management accounts.

Step 3. When the cash is received, you then Debit Bank and Credit Sales ledger. A credit note should be raised for the sales value of goods returned (with a debit to the SOR deferred sales provision account).

Step 4. If you eventually receive more than the 60% you expected, then you can debit the SOR deferred sales provision (B/S) and credit the SOR sales account (P&L). If it’s less than you anticipated, then the journal will need to be a credit to the deferred sales provision and a debit to the SOR sales account.

For an example of an SOR addendum to your business terms, visit http://financialcontroller.indicator.co.uk (FC 03.04.02).