Can you reverse a sale, if made to a related party?

📌 CONCEPT: A sale to a related party must be recorded at the market price, not at the selling price. If the sale is recorded at the selling price, it needs to be reversed or adjusted to reflect the correct market price.

📐 RULE / FORMULA: According to AS-18 (Related Party Disclosure), the sale to a related party should be recorded at the market price, and any difference should be adjusted in the profits and losses account.

💡 WORKED EXAMPLE: Suppose XYZ Ltd. sold goods worth ₹ 50,000 to its CEO's brother at 20% below the market price, which is ₹ 60,000. The difference of ₹ 10,000 is adjusted in the profits and losses account. In the next accounting period, this amount is added back to the sales account.

⚠️ COMMON MISTAKE: Students often forget to reverse the sale transaction and only adjust the profits and losses account, which may lead to incorrect financial statements.