JournaldrillSales returns and allowances
When a customer returns goods, debit Sales Returns and Allowances (a contra-revenue account) and credit Accounts Receivable or Cash at the selling price. If the goods go back into stock under a perpetual system, also debit Inventory and credit Cost of Goods Sold at cost. A price allowance uses only the first entry.
Syntax
Dr Sales Returns and Allowances / Cr Accounts Receivable (or Cash); restock: Dr Inventory / Cr Cost of Goods Sold| Part | What it is |
|---|---|
Sales Returns and Allowances | Contra-revenue with a debit balance, subtracted from Sales Revenue to give net sales. |
Accounts Receivable / Cash | Credited for the credit memo or refund at selling price. |
Inventory | Debited at cost when returned goods can be resold. |
Cost of Goods Sold | Credited at cost to reverse the original cost entry. |
Examples
Dr Sales Returns and Allowances 1,200 / Cr Accounts Receivable 1,200; Dr Inventory 700 / Cr Cost of Goods Sold 700Result: Net sales down 1,200, COGS down 700, gross profit down 500
Goods sold on account for 1,200 (cost 700) returned in good condition and restocked.
Dr Sales Returns and Allowances 300 / Cr Accounts Receivable 300Result: Net sales down 300, receivable down 300
Customer keeps slightly damaged goods and receives a 300 price allowance; no inventory moves.
Dr Sales Returns and Allowances 250 / Cr Cash 250Result: Net sales down 250, cash down 250
Cash refund on a cash sale; if the item is unsellable, no inventory entry is made.
Common mistakes
- Debiting Sales Revenue directly: use the Sales Returns and Allowances account so management can see how much is being returned.
- Restocking at the selling price: the Inventory debit and COGS credit use the original cost of the goods.
- Making the inventory entry for an allowance: an allowance leaves the goods with the customer, so only the revenue side is adjusted.
Practice Sales returns and allowances
These drills check your answer on live data, free, no account needed.
- Sales return restockedA customer returns a jacket that Cedar Lane Boutique sold on account for $420. The jacket cost Cedar Lane $250, is in perfect condition, and goes back on the shelf. The customer has not yet paid. Cedar Lane uses a perpetual inventory system.
Questions
Is sales returns and allowances a debit or credit?
It is debited when a return or allowance is granted. It is a contra-revenue account with a debit normal balance.
Where do sales returns appear on the income statement?
They are deducted from gross sales, together with sales discounts, to arrive at net sales.
Related
- Sale on accountHow to record a sale on credit: debit Accounts Receivable, credit Sales or Service Revenue, plus the cost of goods sold entry and the later collection.
- Cost of goods soldHow to record cost of goods sold: Dr Cost of Goods Sold, Cr Inventory at each sale under a perpetual system, or compute it at year end under periodic.
- Collecting a receivableHow to record a customer paying an invoice: debit Cash, credit Accounts Receivable. Partial payments, early-payment discounts and why there is no revenue.
- Purchase discountsHow to record paying a supplier within the discount period: Dr Accounts Payable, Cr Cash and Cr Inventory (or Purchase Discounts). Gross and net methods.