Chief Considerations in Handling Instalment Sales.—From the accounting standpoint, the chief question is that of making the estimate for loss from uncollectible accounts. From the standpoint of financial management, instalment sales present the problems of passing on credits before taking the risks and afterwards of pushing collections so as to prevent, whenever possible, forfeiture and consequent loss. It is not purposed to treat of these phases here, for which the student is referred to standard works on credits and collections.
Sales for Future Delivery.—From a legal point of view, the receipt of a purchase order gives rise to certain rights and obligations enforceable at law between buyer and seller. While the seller may not be able to enforce specific performance of the contract, yet he is entitled to the damage incurred through nonperformance. Every merchant knows, however, that the cost of securing the remedy is usually higher than the resulting gain and, furthermore, an action against the customer frequently causes the loss of his trade.
Sales for future delivery do not always materialize, since either the buyer or the seller may wish to cancel the contract. A conservative policy therefore demands that the sale be not booked until delivery is made. The order, however, may be received in one fiscal period and the sale be credited to the period in which the goods are delivered, while the major part of the expenses in connection with the sale may have been incurred during the period in which the order was received. The current period then is charged with the expenses but does not receive the credit to which it seems entitled. Therefore, the portion of the selling expense incurred during the period in which the order was secured should be deferred to the period which receives the credit for the sale.
This policy should be followed even when the goods covered by the future sale are set aside specifically for future delivery and the sale should not be booked until delivery is made. At inventory time such goods should be included at cost, with the deferred expense charge as above. Occasionally an unscrupulous merchant in need of cash will bill such goods and discount the invoice; but for the reason given above such goods should not be charged to the customer until delivery is made.
Department Store Sales.—As indicated above, in a department store sales are usually classified by departments. The two classes of sales tickets, cash and credit, are sorted by departments and the totals are entered daily either in the sales journal or on the loose sales sheets which, when filed in a binder, make up the sales journal. At the end of the month the journal is posted to the various department sales accounts. Each day the entries on the sales journal are checked against the cashier’s record of cash received from sales and the bookkeeper’s record of charges posted to customers.
C. O. D. Sales.—For this class of sales the credit is booked in the usual way but the debit is made to a C.O.D. account. The packages are charged on the shipping department’s memorandum records to the various delivery men who are credited with the collections turned in. These collections form the basis for the credit to the C.O.D. account on the ledger. Any balance in the C.O.D. account shows the amount of the undelivered goods still on hand in the shipping department or on the wagons and therefore charged against the various drivers.
Approval Sales.—In many lines of business approval sales are common. Merchandising concerns frequently send goods to customers for trial and inspection, with the privilege of return if the goods prove unsatisfactory. Publishing houses often send out books—both single volumes and whole sets—with a few days’ examination privilege. This class of business is often handled in a rather unsystematic fashion. Usually it is impossible to discriminate among prospective customers, since offers of this kind must be made to all alike. Consequently the privilege is often abused by the unscrupulous.
Accounting for Approval Sales.—This abuse creates the problem of a correct method of handling approval sales. The difficulty is rather one of organization and administration than of accounting procedure; the record-keeping presents no new difficulties and under certain conditions may be likened to the methods of recording outward consigned goods. In no sense are such transactions to be regarded as sales and handled in the regular sales records, thereby showing a profit not yet earned. The correct method, both from an accounting and a legal viewpoint, is to keep a memorandum record of approval sales similar to that made for consignments.
Unlike consignments, however, the price shown in the invoice is the actual selling price of the goods, and the sale if consummated is treated as a regular sale, no effort being made to keep the profit or loss on approval sales separate from the profit on regular sale transactions.
In the retail trade the prevailing practice in handling approval sales is to enter the charge to the customer’s account when the goods are sent out and to credit the account for all returns. In this way the books keep record of all goods out on approval and provide an adequate check against lost or misplaced goods.