Returns Inwards or Sales Return Basic Concepts

Sales returns are a reduction in the actual sales which occurs when a customer, for whatever reason, returns the item for a cash refund or a credit to his/her account.

The reason for a sales return is usually because of a product defect or a service failure. Sales returns can be thought of as reductions in sales, but they do not involve any cash outlay by the company.

Sales returns are an important part of the sales process because it allows a company to continuously provide high-quality goods and services to their customers.

Returning items, in a way, also helps in building good relationships with the customers, which is important for maintaining repeat business and for increasing new business.

Explanation

Occasionally, goods sold to debtors on credit may be returned by them for various reasons, viz, if the goods are defective, or in excess of their order, or are other than the ones ordered, etc. On certain occasions, a trader may find that the amount charged by him in a particular invoice may have to be reduced, or even totally nullified. 

The reasons may be:

  • If the goods are returned.
  • If there is an error in the invoice, change an amount higher than the correct amount.
  • If the goods are defective and the seller agrees to reduce the price rather than ask for their return.
  • If the invoice doesn’t allow sufficient trade discount, or if after the issue of the invoice, the seller agrees to increase the rate of trade discount.

You will recall that the customer’s account is debited when an invoice is issued to him. Thus, in order to reduce the amount of debt in the account, the seller will need to credit the personal account of the customer returning the goods/or being allowed a reduction in the amount charged by an invoice. 

He does this by issuing the debtor with a credit note. A credit note is therefore opposite in effect to an invoice. An invoice debits the customer making him liable to pay the amount whereas a credit note credits the customer absolving him from the responsibility of paying the stated amount. 

All credit notes issued to customers are recorded in the Returns Inwards Book. It is important to note that all credit notes, issued for whatever purpose (whether for return of goods, or for correction of an error, or for grant of extra trade discount, or for any other reason) are entered in this book, which is also known as returns inwards and Allowance Made Book.

Types of Sales Returns

1) Cash-Refund Sales Returns

This includes refunds given to customers who return their items and receive cash as a refund.

2) Credit-Memo Sales Returns

This involves the customer returning the item and in turn, will receive a credit memo for future purchases. 

3) Store Credits

These are issued by retailers where they give discounts on certain items due to returned items.

Example

Record the following transactions in the Returns Inwards Book of John.

August 2: 

  • Goods returned by Muller, a debtor, gross value $500, on which 20% trade discount had been allowed. (Cr. Note No. 732)

August 5:

  • Harry, a debtor, was allowed a reduction of $1,210 in an invoice issued to him earlier. (Cr. Note No. 733).

August 10:

  • Goods returned by David, net value $680, (Cr. Note No. 734).

August 17:

  • Michel was issued with an invoice for $2,400 without any trade discount. he pointed out the error and was issued with a Cr. Note No. 735, allowing a 25% trade discount on the invoice.

August 25:

  • Teena was sold goods for $8,600. Some of these goods reach her in a damaged state. Lawrence agreed to allow a reduction of $1,400 and issued her Cr. Note No. 736.

The Return Inwards or Sales Return Book of John will appear as follows:

Notes:

  • Muller returned goods with a gross value of $500. As he had been allowed a 20% trade discount, the net value of these goods as charged to him, was $500 less 20% trade discount = $400 which is now credited to him.
  • The figure of $600 is 25% of 2,400, the gross value of the invoice.

Posting Return Inwards Book to Ledger

When the Return Inwards Books reaches the Ledger Clerk, he:

(a) debits the returns inwards account in the ledger with the total of the book, inserting the appropriate folio number in return inwards book.

(b) credits the personal account of each individual debtor with the amount of credit note issued to him, and inserts the appropriate folio number in the returns inwards book.

Thus the total debit ( in returns inwards account) equals the total of credit entries made in the personal accounts of all relevant debtors.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.