What it means
In a normal sale, the retailer buys the goods and owns them, even if they do not sell. Under sale or return, the retailer treats the goods as being on trial.
If they sell, the retailer pays the agreed price, and if not, the retailer returns them. This arrangement helps new or small suppliers get their products into shops because it lowers the risk for the retailer.
The price is that the supplier waits for payment and carries the stock risk. It also needs to accept returns of unsold or damaged items.
The accounting depends on who has control of the goods. In many cases the supplier keeps the goods in its inventory, or records a sale only when the retailer sells them on, because the retailer can return them.
Retailers usually do not record the goods as inventory until they have the right to keep them. Where a supplier does record a sale on delivery, it must estimate the likely returns and reduce revenue by that amount.
Based on past experience, a book publisher might expect 20% of copies to come back, and it records a provision (a set-aside amount) for them. The terms should be written down.
They cover how long the retailer may hold the goods, who pays for return shipping, the condition required for a return, and the date by which unsold items must be reported. Sale or return is related to consignment, in which a supplier places goods with an agent that sells them for a commission.
The two terms are often used loosely, so contracts should say clearly where ownership sits.
In practice
Real-world examples
Example 1
A small candle maker places 200 candles in a gift shop on sale-or-return terms at $9 each. After eight weeks the shop has sold 150 and returns 50. The maker is paid 150 x 9 = $1,350 and takes the unsold candles back. She uses the shop's sales data to decide how many to make for the next season.
Example 2
A wine merchant lets a new restaurant take 60 bottles on trial at $20 each. The restaurant uses 36 bottles in the first month and returns the rest. The merchant invoices 36 x 20 = $720 and records the returned bottles back in inventory. The merchant also checks that the returned bottles are in saleable condition.
Example 3
A fashion label delivers 500 garments to a department store at $40 each under sale-or-return terms. Based on previous seasons, 25% are expected back. The label's finance team records revenue of 500 x 0.75 x 40 = $15,000 and sets aside a provision for the returns. The provision is reviewed once the actual return figures arrive.
Think of it
Imagine borrowing clothes from a friend's wardrobe for a weekend party. You take five outfits home, but you only pay for the single dress you actually wear, bringing the other four back clean on Monday morning.
Formula
Calculation
Supplier revenue = (Units delivered - Units returned) x Price per unit
Suppose a publisher delivers 1,000 books to a retailer at a wholesale price of $12 each, a delivered value of $12,000. The retailer sells 700 and returns 300. Revenue is (1,000 - 300) x 12 = 700 x 12 = $8,400. The value of returned goods is 300 x 12 = $3,600, which is 30% of the original delivery.Case study
Seen in the real world
Fernhill Books is an illustrative, fictional publisher that sold 20,000 copies of a new title to bookshops on sale-or-return terms at $10 each. The sales team reported $200,000 of revenue in the month of delivery.
Six months later, bookshops returned 6,000 copies. The finance director had not set aside a provision, so revenue was overstated by 6,000 x 10 = $60,000, and the shortfall appeared in a later period as a credit note.
The company now estimates returns using the experience of the past three years, which averages 28% of copies, and it records revenue net of a provision. It also reviews the estimate after each season. In this illustrative story, the board also asked sales to report returns monthly, which improved the print-run planning.
Watch out
Common mistakes
- Recording the full value of goods delivered as revenue without allowing for returns.
- Leaving the terms vague, so that disputes arise over who pays for return shipping and what condition goods must be in.
- Forgetting that the supplier's stock risk remains, so cash is tied up for longer than under a normal sale.
Questions
People also ask
What is the difference between sale or return and consignment?
In consignment, the supplier keeps ownership and the seller acts as an agent for a commission, whereas in sale or return the retailer may take ownership if it keeps the goods past an agreed date.
Who bears the risk of loss or damage?
The contract should say, and where it is silent, the risk usually stays with whoever has ownership, which can be unclear, so it is best to agree it in writing.
How should a supplier account for expected returns?
By reducing revenue with a provision based on past return rates, and updating the estimate as actual returns arrive.