Sales Returns and Allowances Recording Returns in Your Books

On the financial statements, sales returns and allowances are disclosed and tracked by management. They are subtracted from gross sales to get net sales on the income statement. However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances. On October 15, the customer pays their account in full, less sales returns and allowances.

In the next section, we’ll talk more about what each debit and credit means for the sale entry. These types of entries also show a record of an item leaving your inventory by moving your costs from the inventory account to the cost of goods sold account. If a customer does not agree sitedudes reviews to exchange goods, the company will repay them or reduce their receivable balance. To make your dreams come true of having a business of your own and managing it nicely, Lio App can help you big time. The app lets you keep all sorts of data together in a more organized manner.

Accounting and Journal Entry for Sales Returns

So once this entry is posted, inventory will be increased, and the cost of goods sold will be derecognized. Once the buyer identifies these problems, the buyer will normally need to return the goods and then ask for returning cash or reducing the credit balance. An allowance is a price reduction on an item, often because of a sale or a flawed item like a floor display model with a dent. At the end of the period, ABC Co.’s net sales on its financial statements were as follows. Some of the reasons why customers may return goods will include the following.

This means that when you debit the sales returns and allowances account, that amount gets subtracted from your gross revenue. The accounting entries for sales allowances will be the same. Instead of debiting the sales returns account, companies will debit the sales allowances account. Therefore, sales returns are goods that customers return to a company.

Popular Double Entry Bookkeeping Examples

The cost of goods sold and a reduction in merchandise inventory is not recorded. As mentioned above, sales return and allowances is a contra account of sales revenue account. To arrive at net sales, we take the gross sales or simply sales revenue minus sales discount as well as sales return and allowances. In a single-step income statement, we do not present the sales return and allowances separately.

• Since the customer paid on October 15, they made the 15-day window, thus receiving a discount of 10%.
• Here is an article explaining you everything about sales return journal entry and more with examples.
• If it were the credit sales, then we should credit to the account receivable account.
• On the credit side, an Accounts Payable account should be recorded along with other applicable accounts, such as Cash or Inventory (for physical goods).
• We will need to keep the returned goods in the company’s warehouse and reflect this transaction correctly in the accounting records.

When merchandise is returned, customers usually ask for a cash refund. However, a customer may find that low-quality (or slightly damaged) goods can be resold at a lower price or they can be used elsewhere. Accounting for a sales return involves reversing (a) the revenue recorded at the time of original sale, and (b) the related cost of goods sold. Purchase returns are items that are returned by the customer after purchasing, while sales returns are items sent from a wholesaler back to their supplier.

How do I set up a sales returns and allowances account?

With the above-mentioned detailed report, George needs to pass the sales return journal entries. Additionally, the estimated remaining remains on sales, cash, inventory, receivables, and the COGS (Cost of Goods Sold). The journal entry that shall be passed in the account books for an accounting of sales return would be as under.

When a customer returns something they paid for with credit, your Accounts Receivable account decreases. Reverse the original journal entry by crediting your Accounts Receivable account. Although you don’t lose physical cash, you lose the amount you were going to receive.