Sales return is the return of products or commodities by customers to the seller, usually within some agreed time period. There may be countless reasons for sales return but some of the common reasons are:
▪ Goods are defective
▪ Goods are not according to the customer needs
▪ Goods are shipped too late to the customer
▪ Wrong Products sent to the buyer
▪ Products are not according to the specifications
One the buyer identifies these kinds of problems, the buyer will normally need to return the goods back and then asking for returning cash or reducing the credit balance.
These will reduce the sales revenues that are recorded in the income statement.
Accounting Entries for Sales Return:
Accounting for sales return is mainly concerned with the revising of revenue and cost of goods sold previously recorded.
For the seller, revenue can be revised by debiting the sales return account (A contra account by nature) and crediting cash/accounts receivable with the invoice amount.
Here is the entry:
Dr- Sales Return allowance / Revenue
Cr – Cash/Accounts Receivable
This entry will reduce both sales amount and cash or account receivables considering the customer/buyer does not make the payment on the goods that they purchase.
This is not finished yet.
Now we have to deal with inventory/goods that customers just returned.
These inventory/goods need to be stored and recorded in the warehouse.
So when the company’s warehouse physically receives the goods, the inventory account will be debited to increase the asset and the cost of goods sold will be credited.
Here is the entry to recognize inventory and derecognition of the cost of goods sold.
Dr – Inventory / Stock
Cr – Cost of Goods Sold
So one this entry is posted, inventory will be increased and the cost of goods sold will be derecognized.
Now let move to the example,
ABC cosmetics, A cosmetic distributor deals in two products, Product Y and Product Z.
On 2nd Feb 2020 the firm record credit sales of 10 pieces for product Y and 15 pieces for product Z to one of its old customers at a price of $50 and $25 each respectively.
On 5th Feb 2020, the customer sent back 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics.
The ABC cosmetics purchase product Y at $40 per piece and product Z at $20.
Show the general entries to record sales and sales return in the books of ABC cosmetics.
1. On Feb 2, the journal entry to record the sales account.
Dr Account Receivable (ABC cosmetics) $875
Cr Product Y sale (10*$50) $500
Cr Product Z sales (15*$25) $375
2. On Feb 2, the journal entry to adjust inventory and record cost of goods sold account.
Dr – Cost of Goods sold $700
Cr – Product Y (10*$40) $400
Cr – Product Z sales (15*$20) $300
3. On Feb 5, journal entry to record the sales return and adjustment of the buyer’s account.
Dr Sales Return Allowance / Revenue (5*50) $250
Dr Sales Return Allowance / Revenue (6*25) $150
Cr Account Receivable (ABC Cosmetics) $400
4. On Feb 5, journal entry to update the inventory account.
Dr Product Y (5*$40) $200
Cr Product Z sales (6*$20) $120
Cr Cost of Goods Sold $320
At the time of preparing an income statement, the amount in the sales return allowance is deducted from the total sales to calculate the actual sales/net sales of the company.
Sales returns and allowances:
Normally sales returns and allowances are two different kinds of transactions, but accounting treatment for both the transactions is the same and mostly the same account is used to record both types of transactions.
Sales returns occur when a customer returns goods to the seller due to some fault, while the term sales allowance used when the buyer agrees to keep the products, but for a lesser price.