'Sales Returns' Definition:

A sales return is an adjustment to sales that arises from actual return by a customer of merchandise he/she previously bought from the business. It is commonly recorded under the account "Sales Returns and Allowances".

Contents:
  1. Definition of sales returns
  2. Classification and presentation
  3. Accounting for sales returns
  4. Examples

Classification and Presentation of Sales Returns

A sales return is recorded commonly under "Sales Returns and Allowances". This account is presented in the income statement as a deduction from "Sales" (or Gross Sales).

Sales returns involve actual physical return of the merchandise with a corresponding refund or credit to the customer's account. Sales allowance, on the other hand, happens when the customer agrees to accept the item with a reduction in its original selling price. Both incidents are adjustments to sales and are recorded under "Sales Returns and Allowances".

Accounting for Sales Returns

Sales returns are recorded at the price at which the items were previously sold. A sales return against a sale on account (on credit) is recorded as:

Sales Returns and Allowances xx.xx  
Accounts Receivable   xx.xx

If the customer already paid the amount and the return involves a refund, the journal entry would be:

Sales Returns and Allowances xx.xx  
Cash / Payable to Customer   xx.xx

Examples

1. MAHOGA Industries sold 1,000 units of a specific wood product to BLADE Industries for $6 per unit, on account. This is properly recorded with a debit to "Accounts Receivable" and credit to "Sales". Later, BLADE returned 100 units because they were defective. In the books of MAHOGA, the sales return would be recorded by debiting "Sales Returns and Allowances" and crediting the customer's account for $600 (100 units x $6).

Sales Returns and Allowances 600.00  
Accounts Receivable - BLADE   600.00

2. CAMAS Company sold a coat to Ms. Dawson for $50. The next day, Ms. Dawson returned the item after discovering defects in its inner pockets. No same item is available as of that time. The business decided to refund the amount paid by Ms. Dawson. The journal entry for the return would be:

Sales Returns and Allowances 50.00  
Cash   50.00

In summary, sales returns are recorded at the amount the item was previously sold. It is recorded by debiting "Sales Returns and Allowances". This account is treated as a deduction from "Sales" in the financial statements.

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