After sales services
Generally, the vendors provide free ‘After Sales Services’ to the customers for a specified period and an estimated cost is loaded on the price of the goods for such services.
Since the amount is received by the vendor for this purpose in advance, a separate account is to be opened known as Maintenance Suspense Account, or Repairs Reserve Account or Service Charges Account.
This account is to be debited for the actual amount of expenses incurred for the purpose and the balance of this account represents profit or loss. But, when such service contract is extended for more than one year, the total service charges are to be allocated against the different related years and each year’s actual expenses are to be compared with the actual amount so allocated for that year. If the actual amount of such charges is, however, less than the estimated amount, the excess to be carried forward until the period of maintenance is over. On the contrary, if there is any deficit (i.e., excess of actual amount over estimated figures) that should be provided for.
Sumana T.V. Ltd. manufacture a T.V. set for Rs. 3,000 and sells it on cash as well as on hire-purchase system. The cash price of each set being Rs. 4,000 whereas the hire-purchase price is Rs. 5,600 payable by four half-yearly installments of Rs. 1,400 each, the 1st instalment becomes due at the end of six months, the sets are to be repaired free of cost for two years. Past experience shows that Rs. 600 is the cost of repairs of which Rs. 200 is for the 1st year. During 1995, 50 sets were sold for cash and 200 sets were sold on hire-purchase basis. The actual cost of repairs in 1995 was Rs. 35,000, in 1996 Rs. 60,000 and in 1997 Rs. 45,000.
Show the entries, Cash Book and Maintenance Suspense Account assuming that the books are closed at the end of each year and all installments are received in them.