Backorder Meaning Examples What Is Backorder

Backorder Meaning

Backorder Example

It shows how well the company manages the inventory and customers & how effectively it communicates to retain its customers. The examples of backorder are as follows:

Mr. A purchases ten buses from the dealer, but the dealer only has four buses in inventory, which he can deliver, and for the remaining six buses, Mr. A has to wait for 7 to 8 months as it takes the dealer 7 to 8 months to get it from the supplier.So Mr. A has two options either he can purchase four buses on the spot and for remaining he can wait for 7 to 8 months, or if Mr. A needs all ten on an urgent basis, he can take four from that dealer and ask the dealer to deliver within two months if possible and if it is not possible then cancel the order for remaining six buses which he will buy from another dealer. So, because of competition, it is important to fulfill backorders within the stipulated time to retain the customer.

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Accounting for Backorders

The backorder needs special accounting as the order received. Still, the product is not sold, and the company has to inform the customers about the status of the product ordered and the expected delivery time. After receiving information on whether to wait or cancel the order, it is upon the customer. The backorders can be treated as a sale on a return basis as it involves the chances of cancellation of the order. The accounting treatment is as follows:

Record the sale as backorder sale and if the company has ordered a supplier for backorder products, record it as backorder purchases. If the manufacturing is in the process, it comes under inventory as a work in progress. If the order is canceled, the company’s sales wouldn’t be affected as it doesn’t record backordered sales as complete sales. Once the order is fulfilled, transfer the backorder sale to a sales account, and if the order is canceled and goods arrive, transfer the backorder sales to the inventory account.

Advantages

Reduces the Inventory Storage Cost – The backorders, if effectively fulfilled within a short period, the customers can wait, and its benefits as a cost advantage to the company. It reduces inventory storage costs.Enhances Customer Relationship – The backorders enhance the customer relationship if they are properly communicated to the customers. Waiting by the customer for products shows the customer’s faith in the product and the company.Determines the Demand for Product – Backorders help determine the demand for the product in the market. It is an indication of high demand and that the company needs to increase the manufacturing or purchase to fulfill the demand.Helps to Stay in Competition – If the company fulfills backorders within a reasonable time, it can stay in the market for longer and can face competition.Determines the Capabilities of the Company and Enhances Efficiency – Backorder indicates that the company has underestimated the demand for its products. Fulfilling it within a reasonable time enhances staff efficiency as the process gets faster to fulfill the order at the earliest.If treated efficiently, backorders make the business run faster and satisfy the customers.

Disadvantages

Cancellation of Orders – Due to backorders, the customer might cancel the order as he might not be able to wait due to the urgent need of the product, and hence the business of the company can be transferred to the competitor.Adverse Impression on Customers and Reduces Goodwill – If the product continuously remains in backorder, it creates the wrong impression in customers’ minds. Eventually, it reduces the faith and goodwill of the company.Indication of Improper Management by Company – If backorders take a long time to complete, it indicates improper management by the company. It needs to improve to sustain itself in the market.Can Enhance the Cost – In the hurry of fulfilling the backorder demands, it can increase the cost as the supplier may sell the material at a higher rate due to high and urgent demand.

Conclusion

Backorders are the orders placed by customers that cannot be fulfilled due to the non-availability of products in stock. It indicates that the company needs to hurry up its operations to remain competitive.If managed well, backorders can benefit the company at large as it reduces the inventory carrying cost and enhances the efficiency of operational staff. If the customers are ready to wait for the product, it is signed by the company that customers have faith in the product, and the company needs to keep the faith.Every company needs to properly communicate to the customers that the order for the product is received and the time limit for delivery of the product. It is upon the customer to wait or cancel the order depending upon the type and goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more of the product and the need of a customer.