Accounting for layaway sales

Layaways

 

To start with Layaways are not sales even though the intention is to sell the products.

 

Under a layaway sale, the seller collects a fixed deposit from the customer until a predefined date when the customer pays the full amount (payments can be done in instalments) and seller delivers the products to the customer. Until this predefined time elapses you can’t record the deposit amount as part of your sale. This is because you have not delivered any product to the customer.

 

It is typical of store owners to have their policies on Layaways. These are called terms and conditions and they may cover payment date, number of payment instalments, completion date (layaway date) and minimum deposit (or Layaway charge)

 

So how then do you record this type of sale?

The key thing to remember when recording your sales figure for accounting purpose is ‘exchange’. Has the exchange taken place? If not, when will the exchange take place?

 

Time for some quick accounting lessons

 

No exchange: when layaway date has not elapsed

Sales Account – no change (no exchange remember?)

Cost of goods sold – no change (this is the cost we spent to buy or make the products. We need this to calculate our Gross Profit)

Inventory Account – no change (we still have our products in stock)

 

If there is a deposit made by customer, we are owing this deposit amount. 

Current Liability Account -  increases (this is only the deposit amount)

We can call this Layaway Liability Account – this helps us to identify our layaway deposits

Cash Account – increases

 

Exchange: when layaway date has not elapsed

Once the customer pays the full amount and we (seller) deliver the products to the customer

 

Sales Account – increases (by the total product sales amount – this should include the deposit amount previously paid)

Inventory Account – decreases (by the

Cost of goods sold – increases (by the amount we bought or made the product)

 

Remember the deposit we received?

Current Liability Account – decreases (by the deposit amount)

Cash Account - increases (by the total product sales amount – this should include the deposit amount previously paid)

 

No exchange: when layaway date has elapsed with no deposit refund

Sales Account – increases (by the deposit amount)

Cost of goods sold – no change (no product was exchanged so there is no impact)

Inventory Account – no change (we still have our products in stock)

 

Remember the deposit we received?

Current Liability Account – decreases (by the deposit amount. We are no longer owing the customer. This may be a case of your store policy not to refund deposit money)

Cash Account - no change

  

No exchange: when layaway date has not elapsed and there is a refund

Current Liability Account – decreases (by the deposit amount – we are no longer owing the customer as we have refunded the deposit money)

Cash Account - decreases (by the deposit amount refunded to the customer)

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