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Sales Returns & Allowances Journal Entries Video & Lesson Transcript

journal entry for sales returns and allowances

This account is for deductions from revenue that result from returns or allowances. This means that when you debit the sales returns and allowances account, that amount gets subtracted from your gross revenue. A sales journal entry is a bookkeeping record of any sale made to a customer. You use accounting entries to show that your customer paid you money and your revenue increased. Sales Returns and Allowances is a contra-revenue account deducted from Sales.

journal entry for sales returns and allowances

However, others will separate them into two accounts for better presentation and processing. Under the periodic inventory system, there is only one journal entry to record the sales return and allowances. The cost of goods sold and a reduction in merchandise inventory is not recorded.

Sales Returns and Allowances Journal Entry under the Perpetual Inventory System

The first approach is to record returns and allowances in general journal and is appropriate for companies with only a few returns and allowances during the year. The second one is to recorded these transactions in a special journal known as sales returns and allowances journal. This approach is more convenient for companies that experience too many such transactions during the year. When a customer buys something for you, you (should) record the transaction in your books by making a sales journal entry. So, when a customer returns something to you, you need to reverse these accounts through debits and credits.

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. When the above entry was posted to the accounts receivable ledger, a small checkmark was made to the right of the diagonal line. On Feb 2, the journal entry to adjust inventory and record cost of goods sold account.

Keep an Open Line of Communication With Your Customers

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. The original copy of this credit memo is sent to the buyer to intimate him that the return or allowance has been approved and his account has been credited. A duplicate copy of the memo is kept by the seller which acts as a source document for recording journal entry relating to returns and allowances.

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Certain transactions would be completely reversed if say the customer returns the merchandise. The separate record helps in the overall analysis of the returns and allowances since this distinguishes between the number of customers who have opted for the allowance and returns. With the above-mentioned detailed report, George needs to pass the sales return journal entries.

Understanding Sales Returns and Allowances Journal Entries

On the financial statements, sales returns and allowances are disclosed and tracked by management. They are subtracted from gross sales to get net sales on the income statement. Credit memos serve as vouchers for entries in the sales returns and allowances journal. Like debit memos, all credit memos are serially numbered, as shown below.

  • If it were the credit sales, then we should credit to the account receivable account.
  • For June 2020, he made $6,00,000 in sales (sales made on a cash basis is 40% and sales made on a credit basis is 60%).
  • You can also lay out a return time frame in your payment terms and conditions.
  • So, instead of adding it to your revenue, you add it to a sales tax payable account until you remit it to the government.

However, the company still need to make allowance for such transactions in their accounting system. This entry details how much money has been refunded or credited to customers from purchases and is used to keep track of sales transactions. The format of the sales returns and allowances journal is shown below.

Return of a Sale Entry

The accounting for sales return and allowances is straightforward and the difference between a perpetual inventory system and a periodic inventory system. It is deducted from “Sales” (or “Gross Sales”) in the income statement. Sales returns refer to actual returns of goods from customers because defective or wrong products were delivered.

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For the seller, revenue can be revised by debiting the sales return account (A contra account by nature) and crediting cash/accounts receivable with the invoice amount. If your sales returns and allowances account is high compared to your revenue account, you may be offering too many discounts or have a product quality issue. You’ll record a total revenue credit of $50 to represent the full price of the shirt. However, the debit to the sales returns and allowances account ultimately subtracts $10 from your revenue, showing that you actually only earned $40 for the shirt. To record a returned item, you’ll use the sales returns and allowances account.

During the same period, ABC Co. made sales of $200,000 to another customer, RST Co. The accounting entries to record revenues from the transaction were as follows. A sales allowance is a reduction in the price of goods charged by a company. Instead, companies offer a sales allowance after when it makes sales. Trade discounts usually involve a reduction in price before the sale occurs. Similarly, a sales allowance does not entail a discount for an early payment, which is what cash discounts are.