Customers often return defective and damaged products to retailers. The balance in the “sales returns and allowances” account represents the difference between gross sales and net sales. Companies track returns and allowances separately for two main reasons: first, they negatively affect profitability; and second, management may use the data to examine return patterns by retail location, product category, and other variables. Management may need to address quality and other operational issues at companies with higher-than-average returns.
Keep a record of each sales transaction, including debit cash and credit sales. For a credit sale, debit accounts receivable and credit sales. If you are collecting sales taxes, you should credit the relevant balance sheet account for sales tax liability. Cash and accounts receivable are balance sheet asset accounts. The sales account is an income statement account.
What is the Sales Returns Journal?
Why is it important to record sales returns?
Accountants track sales returns to maintain accurate data and make critical business decisions. Keeping track of returns can help in the following ways:
What is a sales return?
When a customer or client returns a product to the seller, that is known as a sales return. A customer may return an item for several reasons, including:
Companies can set their own return policy. Options include charging a restocking fee, allowing free returns within a set timeframe, or only allowing returns with a receipt. Some companies may offer an exchange or store credit. Accountants can enter these transactions into a sales returns account after confirming that a return complies with a company’s policy.
A sales return versus a sales allowance
It’s critical to comprehend the distinction between a sales return and a sales balance in accounting and bookkeeping. You might come across a category in your career called “sales returns and sales allowances.” In a ledger, these categories frequently coexist in the same account. These are two distinct transactions, both related to customer satisfaction. A customer wants to exchange a product for a refund or store credit during a return. A customer accepts a discount for a faulty or damaged item during a sales allowance. Both types of transactions can be tracked by accountants to help maintain accurate records.
How to record a sales return
You can record a sales return transaction by following these steps:
1. List the return and record the return type
Find out first how the client made the initial payment and how the business returns the funds. Note whether the buyer used store credit or cash. When a client or customer buys something, they have store credit, which gives them a certain amount of time before they have to pay for it. It will be simpler for you to record and balance these transactions if you know how a customer paid for a return.
2. Verify the return meets the companys policy
Next, verify the return follows the approved company return policy. Many businesses have return windows, or a period of time during which they accept returns.
3. Record a sales return transaction
Next, you can record the sales return on the company’s accounts using the return information. You can record the funds in the sales return and allowances account for both cash and credit sales. To keep the books in order, you can also keep track of where this money comes from. You can show a decrease in the cash account for cash refunds. An item returned that was bought with credit reduces accounts receivable.
4. Update inventory
Sometimes returned items go back to a companys inventory. For instance, a retailer may resell an item of usable, undamaged clothing that a customer returns. This item is now a part of their inventory. This item can be added to the inventory account record, and the cost of goods sold can be reduced by the same amount.
Example sales return entries
Depending on the business and the type of transaction, a sales return entry may look differently. Here are entries for two common types of returns:
Example 1
One week after buying a hat from Fine Fabrics, a customer returns it. When the customer paid cash, they discovered they had received the same item as a gift when they got home. Instead of an exchange or store credit, they prefer to receive a cash refund. Fine Fabrics accountant records the following in the companys books:
Date: 03/01/2021
*Sales returns and allowances: +$50
Cash: -$50*
Example 1
A client purchases 20 new computers from TechWorld Unlimited. Each computer costs $100, and the customer used credit to buy them. When the client realizes they purchased more than they needed, they return 5 computers. The accountant for TechWorld Unlimited records this transaction by depositing $500 and $100 for each computer returned to the sales return account. The entry looks like this:
Date: 02/15/2021
*Sales returns and allowances: +$500
Accounts receivable: -$500*
FAQ
What is a sale return?
A product or service that a customer returns to a seller for a full refund is known as a sales return. Usually, sellers give customers a certain amount of time to decide whether or not they want to return an item. There is always a possibility that the purchased item will be flawed.
What is sale return with example?
When a customer or client returns a product to the seller, that is known as a sales return. Excess quantity: A customer may have ordered more items than they need, or a company may have unintentionally sent additional products, among other possibilities for returns by customers
What is sales return also known as?
Is sales return a debit or credit?
The sales return account has been debited in accordance with the current accounting standard because it causes the company’s revenue to decrease. The expected accounts receivable should be credited by the amount of sales returned in the event that the sales were made on a credit basis because no money will be received.
