Journal entry for sales return (returns inwards)

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

Definition of Return Inwards

Occasionally, the merchandise sold to customers are returned by them due to one or more reasons. In accounting, such returned merchandise are termed as sales returns or returns inwards. The major reasons of sales returns are:

  • defective merchandise have been shipped to customers.
  • excessive quantity of merchandise has been shipped to a customer.
  • low-quality merchandise have been shipped to customers.
  • merchandise shipped to customers do not match the order specification.

When merchandise are returned, the customers usually ask for a cash refund. However, a customer may find that the low quality or slightly damaged goods can be resold at lower price or they can be used elsewhere. In such circumstances, he usually prefers to retain the goods in question and ask for an allowance (a reduction in price) from the seller rather than returning the goods and asking for a refund.
The refunds and allowances discussed above are accounted for by maintaining an account known as “sales returns and allowances account”.

Journal entries:

Return of merchandise sold for cash:

When merchandise sold for cash are returned by customers, “sales returns and allowances account” is debited and “accounts payable account” is credited. This entry is made when an intimation for the merchandise being returned is received from a customer. After it, another journal entry is required in which “accounts payable account” is debited and “cash account” is credited. This journal entry is made when cash refund is given to the customer for the goods returned by him. These two journal entries complete the accounting process required in the books of seller for the return of merchandise.
Consider the following example:

Example:

On January 1, 2016, Modern Trading Company sold merchandise for $2,500 to Small Retailers. The Small Retailers received the delivery on the same day and found that the merchandise costing $500 were not according to specification. These merchandise were returned to Modern Trading Company on the same day. The Modern Trading Company granted a cash refund of $500 to Small Retailers on January 2, 2016.
Required:
In the books of seller (Modern Trading Company), make a journal entry:

  1. at the time of sale of merchandise for $2,500
  2. at the time of return of merchandise costing $500.
  3. at the time of cash refund of $500.

Solution

journal-entry-for-sales-return-img1

Return of merchandise sold on account

When merchandise are returned by a credit customer, only one journal entry is required. In this entry “sales returns and allowances account” is debited and “accounts receivable account” is credited.
Consider the following example:
Example 2:
On February 1, 2016, John Enterprise sold merchandise for $1,500 to Sam enterprise on account. On the same date, the merchandise amounting to $200 were returned to John Enterprise because they were of inferior quality.
Required: Make journal entry in the books of John Enterprise at the time of sale and at the time of return of merchandise.

Solution

journal-entry-for-sales-return-img2

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