Sales Returns Definition
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.
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.
Accounting Treatment for Sales Returns
Generally, a sale is recognized when the transaction occurs, whereas a return is not recognized until the product has been returned to the company.
A seller will then have to record a sales return by debiting a Sales Return and Allowances account and crediting the Accounts Receivable account in a case where the sale is made on credit.
The credit to the accounts receivable account will reduce the outstanding amount of accounts receivable.
Conversely, if the sale was made against cash, the journal entry will require the same account to be debited but the credit will be against cash or payable to customer account.
The sales returns account is classified as a contra revenue account. It causes a deduction from the gross sales and correspondingly, causes a decrease in the net sales figure.
Also, take note that sales returns are recorded at the amount the product was previously sold.
Sample Illustration of Sales Returns
Company ABC, Inc. has sales in the amount of $10 million for a certain month. However, there were sales returns in the same period in the amount of $200,000.
In this case, Company ABC’s net sales would be reduced from $10 million to $9.8 million.
Let’s assume that the sales return in the example is against a sale on credit. To record the sales returns, a journal entry is first made by debiting the Sales Returns and Allowances account and crediting Accounts Receivable.
However, if the sales return is against a sale on cash, the journal entry will look like this:
Impact of Sales Returns
Sales returns are considered a normal part of doing business because it is expected that there will be some sales return in the future due to the limited availability or imperfections of certain products. Therefore, sales returns should not cause too much concern for companies.
However, if the amount of sales returns are increasing significantly each month, companies should identify why this is happening.
If the sales returns and allowances account is continuously increasing, it may mean that there is a problem with the company’s goods and services.
A major reason for this could be because of defective products or rapidly changing fashions so companies should provide better guarantees to ensure customer satisfaction and also keep up to date on current fashion trends so their products don’t become obsolete after just a few months or weeks.
Also, if this account is continuously increasing, companies should ensure that they are giving their customers the correct change because it could cause them to return items that result in sales returns.
If this does happen, companies should make sure not to give too little change back because this will also result in customer dissatisfaction and possible sales returns.
How to Minimize Sales Returns
Here are some tips businesses can consider in order to minimize sales returns:
Have quality control in place.
Getting quality control in place will ensure that products are defect-free. Also, ensure that staff members are properly trained to prevent them from making mistakes in production.
Describe product features accurately.
One of the most common reasons for product returns is when customers find that the item they are receiving does not match the product description.
Make sure to describe the product’s features accurately so customers will have a guided expectation of the product and will be satisfied with their purchase.
Study product trends.
It is important to keep up with the latest trends in the market to make sure you are selling products that are obsolete.
Having a keen eye for product trends can help businesses keep up with their competitors and know which products are best to sell.
Give guarantees to customers regarding the quality of goods and services they purchase.
This will help prevent returns, especially for high-value items.
Also, make sure not to give guarantees on products that are easily damaged or out of fashion because this could result in customer dissatisfaction and more sales returns.
Keep an open line of communication with your customers.
This will ensure you receive feedback and can address any problems with your products and services before they result in returns.
Sales returns are an unavoidable part of doing business because it is impossible to make every customer completely satisfied with their purchase. Although it is normal, businesses should manage it well because it will eventually affect income.
With the tips listed above, businesses may be able to minimize the amount of sales returns that they receive.
Additionally, it will also help if businesses impose a sales return policy before they are to accept a return. This will allow the control of sales returns making sure that items are truly valid for return and are not only returned with impunity from customers.
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.