I'd post a credit note against sales too. If you are using sage you will not be able to post a cheque to a customer so you have to create a dummy invoice and give it the mispostings code, then pay the cheque to the mispostings code to clear that account.

Hi Andrew,

I can see exactly what your saying here.

The previous postings took this as a return or price reduction but it is actually neither of those.

The goods required repair to make them fit for purpose. That would make the cost incurred a cost of sale, not a reversal / part reversal of a sale. The sale happened, nothing except return for refund can reverse that.

This isn't a discount to the sales price so it shouldn't go to that T account.

Another complication to throw into the boiling pot here. I assume that all goods carry a warranty? Actually, in almost all cases they have to by law. As such there should be a liability recognised in the balance sheet against the estimated future cost of repairs.

So, should not the double entry for this be :

(Dr) Liability (Reducing the Liability account)
(Cr) Cost of sales (Increasing the cost of sales account)

And leave sales as it was.

This will have the effect that the operating profit is reduced due to the repairs and the liability is reduced by the actual cost of repairs.

However.... Now, the added complication is that the repair was done by the client rather than by yourselves. Obviously this means that the cost of repair would have been higher than you would have allocated a liability for and the money will have to be transferred from the bank.

So, rather than Crediting Cost of Sales in the above example this surely means we should credit bank. that means that all that has happened is that we have reduced the liability by legitimately paying the money out of the company.

If however the situation was that no liability had been set up for estimated cost of repairs then the double entry must be :

(Cr) Bank (Reducing money at bank)
(Dr) Cost of sales (Effectively increasing the cost of the sale)

Again, as this is not a refund or discount we cannot do anything that adjusts the actual sale.

Well, that's my two penneth worth. Sure that everyone will now disagree with it.

talk in a bit,

Shaun.

Think that I'm still only a trainee in the there or there abouts methodology.... Doesn't help I suppose that the concept sends shudders down my spine!

I'm waiting for Bill to jump in on my dubious double entry in my reply. I just know that there's something not completely right about it but it's not jumping out at me.

The idea is sound though that the sale has happened and nothing should change that so it has to be the cost of sale that changes.

Likelihood is that the amounts that we're talking about are immaterial to the accounts so this is really only a theoretical debate anyway... Still worth having the debate even if Bethan goes with another approach.

As I've said before. You can take the boy out of banking but you just can't take the banking out of the boy.... No playing with those words or the forum police will ban us!

Shamus wrote:

---

I'm waiting for Bill to jump in on my dubious double entry in my reply.

---

What do you mean???

I agree that it is not sales return.

As the problem was caused (allegedly) by faulty workmanship, I would be inclined to either create an indirect expense of something like Warranty Rectifications or if the company is making a goodwill gesture and not admitting a liability a Service Goodwill account.

I'm thinking that if a product is sold and returned faulty, the retailer will return it to the supplier, who in turn send it back to the manufacturer both of which would be treated as a sales return. When it gets back to the manufacturer, they have nowhere else to post it other than either a Warranty Liabilities account (as Shaun says, current liability arising from past event) or if no fault is found (believe it or not it does happen) they will either reject the claim or write it off to a goodwill policy account.

DR Warranty or Goodwill
CR Bank

Or deny it all, do a Dell Boy and scarper

Let the debate begin

Bill

That's the warranty administrator coming out in me

To paraphrase a quote from Pygmalion "By gosh I think he's got it".*

I thought that I was going to get crucified on my approach but it seems everyone's agreeing with my general idea on this one.... I suppose that the law of averages suggests that I had to get something right eventually!

Just joshin (before everyone agrees with me!).

I can see Bill's goodwill addendum as well. Well spotted that man.

Really going to miss being able to make a technical debate out of just about anything. Suspect like the "I'm going to give this up to study" I'll just come sneaking back on when I can.

Talk in a bit,

Del Boy.


* the actual quote was "She's got it".

ok maybe it is not sales returns but this would be an easy solution for you instead of going down the accounting theory route like others did... unless as someone said if it happens often you might would consider setting up an account for this. but as you asked this question in the first place it is probably not the case...

attila

Hi Andrew,

that was actually my angle on things as I am pretty much coming from the dark side.

In the later ACCA exams you get fed the line that there is often no set answer and that any reasonable argument will be considered.

The FRS related to the liability part would be FRS12 Provisions, contingent assets and contingent liabilities although to a certain extent FRS15 Tangible Fixed Assets, FRS3 Reporting financial performance and FRS5 Reporting on the substance of transactions also needs to be considered.

I'm really going to hate it when we move over fully to International Financial Reporting Standards as I'm going to have to learn the whole damn lot again!

Regardless as to what the bookkeeper has done previously the accountant should have picked up that there was a liability associated with this per FRS12 and set up a provision against future claims.

Any of the above treatments (except taking the costs back to sales) could be used by the accountant at year end to play around with pretty much as they see fit for producing the final accounts.


-- Edited by Shamus on Friday 2nd of April 2010 10:30:15 AM

Bank holidays might soon be the only time that I get to make any postings Bill! (actually, back office work bank holidays as well!).

Been here before though. Approached by a bank, big project... Then Whoosh, in the blink of an eye the project that was so important for the future profitability of the bank is shelved indefinitely for some other equally bank defining project.

Just mustn't buy anything until the inks dry on the paper!

Agree with you totally on the materiality side of things. As mentioned in my post at 17:14 last night this really is just a theoretical debate.

Nice line about affecting the user of the accounts. I know exactly where you got that one from.

"Information is material if it's omission or misstatement could influence the economic decisions of users". ISA320 Audit Materiality, paragraph 3.

Come on Bill, admit it, you're a secret accountant!

Hope that you're having a good day matey.

Talk later,

Shaun.

Shamus wrote:

---

.............
Nice line about affecting the user of the accounts. I know exactly where you got that one from.

"Information is material if it's omission or misstatement could influence the economic decisions of users". ISA320 Audit Materiality, paragraph 3.

Come on Bill, admit it, you're a secret accountant!

Hope that you're having a good day matey.

Talk later,

Shaun.

---

Bit like yourself Shaun, I read something somewhere, and when the situation requires a memory recall, it just appears in my head. Unfortunately, not verbatum, as per your quotes and sometimes I know there is a more defined answer and go hunting for it.

When I do the bookkeeping for clients, I always try to remember why the books are being kept and that the client isn't the only person who may see them.

To be honest, I personally wouldn't want to be an accountant as such, as I enjoy the technical aspects of bookkeeping but I would like to have a greater understanding of the subject. That's why I do have the odd read of the various FRSs etc and in hindsight and only for that reason I should have gone down the AAT route.

Anyway not been outside yet. Typical Cornish bank holiday here, the place is full of wet tourists. How 'bout you, do you have your son with you for the hols?

Bill

Hi 

Late comer here.

I was a bit confused with a "Cost Of Sales" account,  as that is part of TP&L Account.

Shaun wrote about warranty on (all ?) Sales and a Provision for servicing those warranties. 


My preference would be a "Warranty Servicing" account, to be used As-And-When.
In this case :   (cr)  Bank   (dr) Warranty Servicing  

Other times it might incure Labour, Parts, Outsourcing, etc. 

How would a Provision be set up ?  
I thought they came out of the TP&L Account at the end of the Financial Year.
In this case it could have occured within a month of the actual sale.


While Googling this question, I came across this article [ link ]
Sorry,  that link didn't work.  
Try a search with :  "dells_warranty_accounting_called_into_question"



Also on this topic,  there was also mention of Goodwill. 
Would a "Goodwill payment" be allowed under MLR ?








-- Edited by ProBowlUK on Friday 9th of April 2010 12:10:26 AM