Understanding Sales Returns and Allowances Journal Entries

As previously stated, each package contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 printer. They offer their customers the option of purchasing extra individual hardware items for every electronic hardware package purchase. Figure 6.11 lists the products CBS sells to customers; the prices are per-package, and per unit. These two journal entries complete the accounting process required in the books of the seller for the return of merchandise.

• A sales allowance is a reduction in the price of goods charged by a company.
• The journal entry that shall be passed in the account books for an accounting of sales return would be as under.
• This entry is made when a customer notifies the business that they will return the merchandise.
• And, you’re increasing your Cost of Goods Sold (COGS) Expense account.
• COGS increases (debit) and Merchandise Inventory-Packages decreases (credit) for the cost of the packages, $6,200 ($620 × 10).

A company, ABC Co., sold goods worth $100,000 to another company, XYZ Co. Companies may offer sales allowances for various reasons, which include the following. Let’s calculate first the sales return value and adjustment that has to be made to the cost of goods sold. The Gross margin on bikes was 25%, and on the Cycle, they earned 30% on cost. Therefore, based on the above information, you must pass sales return entries.

What is a contra-revenue account?

It is the contra entries of the sales account, increasing in debit and decreasing in credit. The main reason that is recording in debit while the sales return happened is that this account will decrease the total sale revenue. Recording sales returns and allowance is straightforward after knowing their accounting treatment.

In most cases, the customer receives a refund when they physically return the good. You can also lay out a return time frame in your payment accounting firm, accounting companies terms and conditions. On 5th Feb 2020, the customer returned 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics.

Sales Returns Journal Entries

This way, you can balance your books and report your income accurately. It looks like they were sent baseballs instead of softballs. Because of this, the Star sales rep rush ordered them softballs, and the team agreed to return the baseballs. The baseballs came back today, so let’s put this entry in the system. We’re going to need to do two things, and it’s important to do them both at the same time or we will just end up with more mistakes.

Your COGS represents how much it costs you to produce the item. Remember that your debit and credit columns must equal one another. Your Accounts Receivable total should equal the sum of your Sales Tax Payable and Revenue accounts.

Posting Entries From Sales Returns and Allowances Journal to Ledger Accounts

Accounting for sales return is mainly concerned with revising revenue and cost of goods sold previously recorded. Account receivable or cash and cash equivalents should also affect whether it is the cash sale 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. In recording a journal entry for sales, you’ll need to pass entry for sales—that is, move the information to all of the different accounts where it needs to be recorded. To create a journal entry in your general ledger or for a sale, take the following steps.

• Therefore, based on the above information, you must pass sales return entries.
• However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances.
• To create the sales journal entry, debit your Accounts Receivable account for $240 and credit your Revenue account for $240.
• For locations with sales taxes, you also need to record the sales tax that your customer paid so you know how much to pay the government later.

After production or acquisition, they hold these goods as inventory until customers order them. Once ordered, companies may deliver the goods or request customers to get those goods from a warehouse. Revenues define the income from a company’s operations during an accounting period. These revenues may arise from the sale of either goods or services. Regardless of their source, revenues play a significant role in a company’s profits and success. Therefore, companies strive to increase the numbers as high as possible.

Debit vs. Credit: What You Need to Know About Accounting Terms

The sales return and allowances account under the periodic inventory system is recorded the same way as under the perpetual inventory system. Both sales returns and allowances represent a reduction in a company’s revenues after it makes sales. The accruals concept requires companies to account for revenues when they occur. Therefore, companies must not treat these transactions on cash settlement.

Instead, they must record it as soon as the transaction happens. Usually, companies record sales in the books when they deliver goods to customers. In this case, the “sales returns and allowances” account is required for recording such transactions. Sales returns and allowances account is the contra account to sale revenues. A sales journal entry records a cash or credit sale to a customer.

Sales Returns

It does more than record the total money a business receives from the transaction. Sales journal entries should also reflect changes to accounts such as Cost of Goods Sold, Inventory, and Sales Tax Payable accounts. Once you get the hang of which accounts to increase and decrease, you can record purchase returns and allowances in your books.