Sales Returns: Definition, Journal Entry, Example, Allowances

Companies that manufacture products and services may offer sales returns or allowance policies. These are a normal part of the business that these companies conduct. Usually, customers return goods sold to them for various reasons. For companies, these sales returns are a reduction in sales. First, however, it is crucial to understand what sales returns are.

What are Sales Returns?

Sales returns are goods that customers return to a company for various reasons. Usually, companies provide this facility to customers to increase sales. In essence, a sales return policy allows customers to return goods when they find issues with those goods. In some cases, companies may offer goods in exchange for any returns. However, some others may return the customer’s money.

A sales return policy is essential in ensuring customers of the quality of the goods delivered. However, it can lead to a decrease in revenues for companies. Some companies may also offer a sales allowance policy, which is similar to accounting treatment. However, both processes are fundamentally different.

What are the reasons for Sales Returns?

As mentioned, customers may have several reasons to return goods to a company. Some of the primary ones include the following.

  • The company sent defective goods.
  • The customer received the goods late, or the company failed to deliver them on time.
  • The company did not send the right order to the customer.
  • The goods do not satisfy the customer’s needs.
  • The company delivered a higher quantity than what the customer requested.
  • The customer made an unintended order.

What are the journal entries for Sales Returns?

The accounting treatment of sales returns involves recording two journal entries. The first entry requires companies to reduce the customer’s account while decreasing revenues. Usually, this decrease in revenues occurs through a contra revenue account. This account does not impact a company’s revenues directly. However, it can lead to a reduction in the income statement later.

When companies receive goods returns from customers, they can use the following journal entries to record them.

Dr Sales Returns and Allowances

Cr Customer account

The above double-entry assumes the customer has not paid for the goods yet. If customers have already done so, the company may create a liability for the customer. In that case, the journal entries will be as follows.

Dr Sales Returns and Allowances

Cr Payable to customer

When customers return sales, the company also receives goods back from the customer. Therefore, it must record those goods in the inventory account. It is the second accounting treatment that involves sales returns. For this process, the journal entries will be as below.

Dr Inventory

Cr Cost of goods sold

Example

A company, Red Co., manufactures and sells electronic items. During an accounting period, the company sold $100,000 worth of electronics. Red Co. records these sales using the following journal entries.

Dr Accounts receivables $100,000

Cr Sales $100,000

However, some of the goods that Red Co. sent were faulty. These goods got damaged during the delivery process. As a result, Red Co. received $10,000 worth of electronics back from customers. However, none of the customers had paid for those goods at the time. The company used the following journal entries to record them.

Dr Sales returns and allowances $10,000

Cr Accounts receivables $10,000

Conclusion

Sales returns are goods returned by a customer. There are several reasons why a customer may do so. For example, these may include faulty goods, incorrect orders, shipping delays, etc. The accounting entries for sales returns involve two steps. First, a company must record a decrease in sales through a contra revenue account. The second step is to record the increase in inventory from those goods.

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