Journal Entry for Sales Returns (Returns Inwards)
Returns Inwards: Definition
- Defective merchandise was shipped
- An excessive quantity of merchandise was shipped
- Low-quality merchandise was shipped
- Merchandise shipped to customers do not match the order specification
When merchandise is returned, customers usually ask for a cash refund. However, a customer may find that low-quality (or slightly damaged) goods can be resold at a lower price or they can be used elsewhere.
In such circumstances, they usually prefer to retain the goods in question and ask for an allowance (e.g., price reduction) 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 the sales returns and allowances account.
Return of Merchandise Sold for Cash
When customers return merchandise sold for cash, the sales returns and allowances account is debited and the accounts payable account is credited.
This entry is made when a customer notifies the business that they will return the merchandise.
Afterward, another journal entry may be required in which the accounts payable account is debited and the cash account is credited. This journal entry is made when a cash refund is given to the customer for the goods they returned.
These two journal entries complete the accounting process required in the books of the seller for the return of merchandise.
On 1 January 2016, the Modern Trading Company sold merchandise for $2,500 to Small Retailers. Small Retailers received the delivery on the same day and found the merchandise costing $500 did not meet the order specification.
These merchandise were returned to the Modern Trading Company on the same day. In turn, the Modern Trading Company granted a cash refund of $500 to Small Retailers on 2 January 2016.
In the books of seller (i.e., Modern Trading Company), make a journal entry:
- At the time of the sale of merchandise for $2,500
- At the time of the return of merchandise costing $500
- At the time of the cash refund of $500
Return of Merchandise Sold on Account
When merchandise are returned by a credit customer, only one journal entry is required. In this entry, the sales returns and allowances account is debited and the accounts receivable account is credited.
On 1 February 2016, John Enterprise sold merchandise for $1,500 to Sam Enterprise on account. On the same date, merchandise amounting to $200 were returned to John Enterprise because they failed to meet the required quality standards.
Required: Pass journal entries in the books of John Enterprise at the time of the sale and at the time of the return of merchandise.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.