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Accounting for Cylinder Stock

Seeking confirmation on Accounting Treatment

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This has been causing me a bit of a headache but I think I have finally got my head around it and looking for confirmation that all this being accounted for correctly.

Company purchases cylinders fills them with gas and then sells them to customers.

The customer is charged a returnable deposit on the cylinder and the following can happen after the first initial sale:-

a) The customer returns with the empty cylinder and it is refilled so the customer is only charged for the gas.

b) The customer returns with the empty cylinder and receives a refund on the deposit

c) Sometimes the customer will never return the cylinder and effectively forfeit the deposit.

To my mind the cylinders are the property of the company and should be counted as stock and this will consist of two parts:-

(1) Unsold Cylinders on the company premises

(2) Cylinders held by the customers.

So it follows at the year end the company should recognise the following in the accounts:

Asset for stock held by customers

Liability for deposits due to customers

(these amounts will probably equal each other)

On an annual basis an assessment should be made on the likelihood of deposits being returned to customer. e.g. if a customer deposit was taken over two years ago then it is unlikely to be returned so the liability and stock should be reduced.

Now have to figure out how the accounting system is working for recording all of the above - still unsure how to account for te deposit returned to customer is this treated as a purchase so that the returned cylinder is brought back into stock on premises?

Any thoughts on all of this would be appreciated.

Replies (16)

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By Wanderer
15th Mar 2019 09:03

Probably need to read the FRS however at the time of the original sale has the seller transferred the significant risks and rewards of ownership of the goods from the seller to the buyer?

Also are we considering material figures?

I'd probably consider
Counting all sales (including deposits) as sales.
Crediting any cylinders returned as sales refunds.
Only count stock as what the company physically has.

Anything else will be a nightmare to assess / administer.

As to "(these amounts will probably equal each other)" - only if they are selling the cylinders at cost.

Thanks (3)
Replying to Wanderer:
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By 2156806
15th Mar 2019 12:22

That is what i had originally thought but this does not recognise the liabilities for deposits due to customers.

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Replying to 2156806:
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By Wanderer
15th Mar 2019 12:27

But the deposit is not due to the customer unless / until they return the cylinder.

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Replying to 2156806:
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By johnt27
15th Mar 2019 12:43

I tend to agree with others on trying to work out the substance over form of the transaction.

So, for example, will your client fill gas bottles not sold by them? Will they refund a deposit for a rusty, dented, broken etc gas bottle? Who is responsible for repairs, checking valves are safe etc, particularly on "used" bottles? Is there a time limit on when the deposit is forfeited?

I think you can fall anywhere in between what you have already suggested and recognising gas bottle deposits in income, possibly with a disclosure for a contingent liability for deposits to be repaid. I wouldn't confuse the requirement to keep customer records of who has paid a deposit and how much, with the double entry.

Finally, what do the accounting policies say, because if the interpretation of FRS 102 is vague you can at least nail your colours to the mast in the financial statements?

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By dejaneiro2005
15th Mar 2019 09:07

I agree with Wanderer, think substance over form.

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RLI
By lionofludesch
15th Mar 2019 09:18

Is the deposit roughly the same as the cost of a cylinder ?

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Replying to lionofludesch:
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By 2156806
15th Mar 2019 12:26

Still to discuss this with the client.

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Hallerud at Easter
By DJKL
15th Mar 2019 12:32

The company has no legal right to the cylinder once it is out with a customer, accordingly it has effectively relinquished ownership of the asset when it is paid for it and it leaves its control.

The company has no obligation to make payment to the customer for the return until the event of return takes place.

Accordingly can it be said the company has a legal obligation at say its year end re cylinders out with customers not at that point returned?

It has made a contractual obligation to redeem once returned but of course will at that juncture receive consideration (in the shape of the cylinder) for that obligation, if the value of the cylinder to be returned equals the sum to be paid what real obligation is there?

In effect the company sells the cylinder offering to buy it back at x price sometime in the future, there more appears to be two distinct transactions in place.

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Replying to DJKL:
RLI
By lionofludesch
15th Mar 2019 13:10

DJKL wrote:

The company has no legal right to the cylinder once it is out with a customer, accordingly it has effectively relinquished ownership of the asset when it is paid for it and it leaves its control.

Is that a guess ?

The deposit might be a sale of the cylinder - or it might not.

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
15th Mar 2019 14:50

The gas companies in my experience never chase you up to return so I would say it is a guess based on experience. We have two or three empties scuffing about our workshops, some have been there so long I doubt the companies they all came from still exist. >20 years.

p.s. You may be correct re company retaining title but I see the transaction more like buying a bottle of lemonade/cola in the 1960s, intrinsically you pay for the bottle at the outset and get money back if you return it. As kids living near Inverleith Park in Edinburgh we used to "borrow" my mum's wheeled shopping trolley and accumulate such wealth to buy Action Man etc accessories.

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Routemaster image
By tom123
15th Mar 2019 13:18

Having always worked in factory settings, and with various gases used all the time, I have never recorded any deposits 'paid' (for example to BOC) as any kind of asset - if indeed that ever happens.

The cylinders just get refilled when an order is placed - or more typically the driver drops off a full cylinder and removes the empty one.

Are you sure, OP, that you are not continuously replacing empty cylinders with full ones (being different actual containers).

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By Michael C Feltham
20th Mar 2019 10:56

Evaluate the BOC (Air Liquide) model.

The cylinders at all times remain the property of BOC. When and where customers do not regularly refill the gas cylinders, and if BOC ran short, then they would instruct delivery drivers to re-possess BOC's property: the gas cylinders.

Personally, I would:

Reserve the deposits as Capital and run a register (similar to an Asset Register). Remembering this is in point of fact a "Security Deposit", against non-performance (Return). No different to the security deposit charged by small plant hire operators.

When and if refills occur, BOC charge simply their published gas re-fill charges; plus a "Delivery" charge, even when and where the user actually takes the empty cylinder to their local BOC centre. BOC were, and remain, of course, a wholly venal and exploitative operation! I suppose when one enjoys an effective monopoly, then one can get away with it!

Over time, BOC change the cylinder formats: particularly for industrial gases including, Acetylene, Oxygen, Argon-Mix, CO2, Nitrogen, Pure Argon etc.

Major gas suppliers scrap cylinders past a certain age, as they are not considered safe to re-fill: such as Oxygen, particularly, since these are filled to 2,000 Lbs Per Square Inch. Old formats cannot be refilled after the specification change and are simply scrap Cast Iron.

In your client's case, continue to treat the deposit as capital for a finite period.

The "Sale" is the refill charge, only. No VAT due as output on Capital Items, remember.

Unlike other deposits it is not a forward payment against a future total invoice: thus the deposit attracts VAT at the appropriate ruling rate.

Thanks (1)
Replying to Michael C Feltham:
Hallerud at Easter
By DJKL
20th Mar 2019 11:12

Is BOC on point here, are they the supplier?

By chance yesterday I had to give a tradesman working on our site a lift to refill a calor cylinder (flat roof felt work) as his van is currently non functional. All we did was phoned around, found nearest calor stockist, took empty one to them,got full one, cash purchase (£17.25) with a hand written invoices with no details given who we were, no invoice addressed to us etc.

The fact is these cylinders are readily returnable at any stockist, as I posted earlier they are akin to lemonade bottles re the deposits, buy bottle in one shop return to another re deposit on bottle. Accordingly I struggle, with this model, to see how ownership of the cylinder in any way is retained by the supplier given his competitor might have it returned to him and in effect pay out the deposit.

Thanks (1)
Replying to DJKL:
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By Michael C Feltham
21st Mar 2019 12:01

Well, one of my companies enjoys a BOC account.

They - BOC - own the bottles: end of. It is in the contract.

In earlier times, another engineering company, also had a very active BOC account; various types of industrial gas.

Propane and Butane Mix - which are the most common - is a different kettle of fish. As are C02 and Nitrogen for booze dispensers. There are now a few competitors.

Propane and Butane Mix are the most commonly supplied gases distributed by a variety of bottlers in a wide variety of canisters. Most "Own" the bottles; except for the throw away variety. Not all containers can be refilled by anyone; nor exchanged. Some are supplier-specific, with agents.

Add to this the touring caravan brigade and the motor-home enthusiasts, regularly traveling between UK and Europe. Even more complexity!

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By whitevanman
20th Mar 2019 12:15

I would, carefully, check the facts here.
Gas bottles are usually owned by the gas supply company (Calor, BOC etc). The arrangements with the customer will usually provide for part or all of the "deposit" to be returned to the customer, if the gas bottle is returned during a specified period. But that agreement is usually between the customer and the "supplier" (Calor etc). The "intermediate" who "sells the gas" may provide the paperwork re the gas bottle but is not a party to it (so far as relevant). As stated elsewhere, the customer can usually obtain a refill at any intermediate who deals with the supplier.
As ever, once the full facts are known, it is likely the treatment of income and expenditure will be straightforward.

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7om
By Tom 7000
20th Mar 2019 17:10

What you really need to think about is the VAT in all of this...…. ooooohhhhh

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