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Accounting Policies... A Sales scenario...

The definition goes “Those principles, bases, convention, rules and practises applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements.

I remember few years ago, there was difference of opinion between our Financial Controller and Sales Director on how to report sales of some items should be. The question was “how to report sales of 1 free item when the customer buys 5 items”. This is usually in retail business when you have schemes that promote customers to buy in large quantitative. The Sales Director was of opinion that this should treated as expenses whereas the Financial Controller said it is question net realisation for sales is less since the company invoices for 5 items but actually sells 6 items.

I have posed this question to many accountants at junior level and most often I have got the answer that the free item should be treated as an expense in profit and loss. The correct answer is to book that 1 sale in question as sales with zero value.

The other question is distributing free samples – How they should be shown in books. As far Indian Tax law is concerned, the seller has to bear the sales tax on these items. How ridiculous? The company is acting as agent to collect taxes … why it should pay tax? Just an increase in cost of sales without realising anything.

I came across an article in a UK magazine with some scenarios. Please suggest how you would treat it as per Indian GAAP in financial statements – Should it be recognised as sale?

  • Distiller sells maturing whiskey to bank with option to repurchase when ready for sale.
  • Football club sells ground and continues to occupy ground on lease.
  • Trade debtors sold to a factor, who then recovers cash from debtors.

Discuss and share your point of views.

Regards,

Santosh Puthran

AICWA

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