How to Define, Find, and Record Sales Returns & Allowances

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journal entry for sales returns and allowances

It is a sales adjustments account that represents merchandise returns from customers, and deductions to the original selling price when the customer accepts defective products. Hope by now you have understood what sales return journal entry is and know how businesses make use of them and record these entries in the account books. These are also important aspects of a business and are done by companies all over the world.

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In the seller’s books, a return or allowance is recorded as a reduction in sales revenue. Since the sales account normally has a credit balance, returns and allowances could be recorded on the debit side (the reduction side) of the sales account. When a business sells products or goods, there is the possibility of a return by its customers due to faulty or obsolescence within the agreed timeframe.

How can sales returns be avoided?

It depends on whether the sale of those goods that were returned were cash sales or credit sales. If you have accounting software or a bookkeeper, you may not be making these entries yourself. But knowing how entries for sales transactions work helps you make sense of your general journal and understand how cash flows in and out of your business. If your customer uses a credit card to buy the item, you’ll debit accounts receivable instead of cash since it’s income that you’re owed, but you haven’t been paid yet.

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Thus, the term credit memorandum indicates that the seller has decreased the customer’s account and does not expect payment. However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances. Therefore, sales returns are goods that customers return to a company.

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Therefore, sales returns should not cause too much concern for companies. However, it should alarm the business if the sales returns and allowances account is increasing because ultimately, this will result in a decrease in the company’s revenue and income. Sales return and allowances account is a contra-revenue account that is deducted from sales.

  • In a company’s general ledger, both sales returns and sales allowances are recorded in a single account known as sales returns and allowances account.
  • When sales are returned by customers or an allowance is granted to them due to delayed delivery, breakage, or quality issues, an entry is made in the sales returns and allowances journal.
  • Sales returns are a reduction in the actual sales which occurs when a customer, for whatever reason, returns the item for a cash refund or a credit to his/her account.
  • The credit to the accounts receivable account will reduce the outstanding amount of accounts receivable.
  • You’ll need to use multiple accounts to show that you received money, your revenue increased, and your inventory value decreased because of the sale.

Sales are credit journal entries, but they have to be balanced by debit entries to other accounts. Companies may offer sales allowances for various reasons, which include the following. Maria Trading Company always sells goods to it customers on account. The company collects sales tax @ 7% on all goods sold by it and periodically sends the collected amount of tax to a tax collecting agency. If the return or allowance involves a refund of the customer’s payment, “Cash” is credited.

Sales Returns and AllowancesWhat are sales returns and allowances?

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The other account that will be affected the same amount as finished goods is the cost of goods sold. The ABC cosmetics purchase product Y at $40 per piece and product Z at $20. Here is the entry to recognize inventory and derecognition of the cost of goods sold. The following are some selected transactions performed by Maria Trading Company during the month of January, 2018.

To illustrate, suppose that Lakeside Electronics issued the credit memorandum shown in the figure below to Champ’s TV Sales for the return of a defective 19-inch TV. The seller usually issues the customer a credit memorandum showing the amount of credit granted and the reason for the return. Now we have to deal with inventory/goods that customers just returned.

Gross Sales Revenue or Net Sales Revenue in a Closing Entry

If a customer originally made their purchase on credit, the sale was part of your accounts receivable, which is money owed to you by customers. How you handle purchase returns depends on your small business return policy. You might offer free returns, charge a restocking fee, accept returns only with a receipt, or not accept returns at all. Or, maybe you decide to compensate customers returning items with store credit. The many features of Lio would help you with your retail business as you would be able to maintain all data on a track that you can use at any time.

journal entry for sales returns and allowances

Overshooting in sales is caused due to overstating of sales returns and allowances. Credit memo numbers are records that allow your company to track credits given for various issues. These memos may correspond to different customers, different reasons for the credit, or even multiple products/services which have been returned. We will need to keep the returned goods in the company’s warehouse and reflect this transaction correctly in the accounting records.

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