Sales returns, or returns inwards, are a normal part of business. Goods may be returned to supplier if they carry defects or if they are not according to the specifications of the buyer.
Accounting for Sales Returns
There is need to account for sale returns as though no sale had occurred in the first place.
Hence, the value of goods returned must be deducted from the sale revenue.
If sale was initially made on credit, the receivable recognized must be reversed by the amount of sales returned. If the sales in respect of the returns were made for cash, then a payable must be recognized to acknowledge the liability to reimburse the customer the amount he had paid for those purchases.
Sales Return - Credit Sale
In case of credit sale, the following double entry must be made upon sales returns:
|
Debit |
Sales Return (decrease in income) |
|
Credit |
Receivable (decrease in asset) |
Example
Bike LTD sells a mountain bike to XYZ for $100 on credit. XYZ later returns the bike to Bike LTD due to a serious defect in the design of the bike.
The initial sale will be recorded as follows:
|
Debit |
XYZ (Receivable) |
$100 |
|
Credit |
Sales |
$100 |
Upon the return of bike, the following double entry will be passed:
|
Debit |
Sales Return |
$100 |
|
Credit |
XYZ (Receivable) |
$100 |
No further entry will be required as the receivable due from XYZ has been reversed.
Sales Returns - Cash Sales
In case of cash sale, the following double entry must be made upon sales returns:
|
Debit |
Sales Return (decrease in income) |
|
Credit |
Payable (increase in liability) |
Example:
Bike LTD sells a mountain bike to XYZ for $100 on cash. XYZ later returns the bike to Bike LTD due to a serious defect in the design of the bike.
The initial sale will be recorded as follows:
|
Debit |
Cash |
$100 |
|
Credit |
Sales |
$100 |
Upon the return of bike, the following double entry will be passed:
|
Debit |
Sales Return |
$100 |
|
Credit |
XYZ (Payable) |
$100 |
When Bike LTD will pay XYZ $100 in respect of the sales return, the following double entry will be recorded:
|
Debit |
XYZ (Payable) |
$100 |
|
Credit |
Cash |
$100 |