Sales returns

As the name suggests, sales returns refer to goods returned by the customers after buying them. Sales return is not an abnormal thing and due to various reasons, a customer may return the goods and the seller may accept the return. Some of the possible reasons for returns of goods are mentioned below:

  • Faulty or damaged goods
  • Goods not as per the customer’s specifications
  • Excess quantity delivered
  • Different products delivered compared to what the customer ordered

There may be a set policy for accepting the return of goods, or even in the absence of a policy, one off sales returns may be accepted by the seller. In either case, accounting treatment will remain the same.

Accounting of sales returns

As the sales returns reduce the sales revenue, therefore, sales value of goods returned by the customers are recorded in a contra revenue account. As the normal balance of revenue account is “credit”, so the normal balance of sales returns account is debit. Net revenue is reported in the income statement after deducting the debit balance of sales returns account from the credit balance of revenue account (gross sales).

Apart from the effect on revenue, the effect on inventory account should also be considered if the goods are not defected and can be sold to other parties.

Let’s take a look at the following example for further clarification.

Example – Sales returns

An electronics company sold twenty laptops to a customer for $20,000.

Scenario I: After two days, the customer returned two laptops worth $1,000 each as these were not as per the required specifications. Cost of each laptop was $800.

Scenario II: After two days, the customer returned two laptops worth $1,000 each as there were major production flaws in the systems.

For each of the above scenarios, show the journal entries that will be required to record the above transactions.

Answer – Entries

Scenario I

Following entry will be made at the time of sale.

Dr. Accounts receivable — $20,000
Cr. Sales revenue —————- $20,000

Following entries will be made to record the return of goods from customer.

Dr. Sales returns —- $2,000
Cr. Accounts receivable — $2,000

Dr. Inventory ———- $1,600
Cr. Cost of sales ———- $1,600

Scenario II

Following entry will be made at the time of sale.

Dr. Accounts receivable — $20,000
Cr. Sales revenue —————- $20,000

Following entry will be made to record the return of goods from customer.

Dr. Sales returns —- $2,000
Cr. Accounts receivable — $2,000

As the laptops are defective and cannot be sold to other customers, therefore there will be no impact of return on the inventory of the company.