A sales return is a commodity or good that a customer returns to a seller for a full refund. Sellers usually specify a duration within which buyers can return merchandise if they are not satisfied with it. There is always a chance that the purchased product will be defective. Customers, therefore, have the right to return an item within a specified timeframe. Sales returns do not include damage done to merchandise because of wrongful use by the user. Therefore, you cannot return a laptop you bought two days ago if you took it to the bathroom and it fell into the bathtub.
Reasons for Sales Returns
Outside of a defective product, there are other reasons a consumer would conduct a sales return.
This happens when the specifications of the item shipped do not match the specifications ordered. If you ordered and paid for a 300L deep freezer and the one shipped to you is a 250L deep freezer, the freezer is not defective, it’s just not what you ordered.
A sales return also happens when you receive the wrong product, e.g., if you purchase a Mac laptop and an HP is shipped to you.
You might also return items bought if you realize that the number of items shipped was more than the number you ordered. This mostly occurs during online shopping where the customer pays at checkout.
Customers have the right to return items if they are delivered later than the agreed delivery time. At this point, a customer may have found another alternative to the item and therefore is no longer in need of the initial purchase.
Recording Sales Returns
A sales return can happen whether the sale was a cash sale or a credit sale. If it is a cash sale, the sale return is recorded in the Sales Returns account and also as a debit to the cash sales account. If the sale is a credit sale, then the sales return will be recorded in the Sales Returns account. It is credited to account receivables. It is a credit to the account receivables because it reduces the total amount of the account receivables. Some companies do not use the intermediary sales return account because it is a contra account – meaning that it is just a deduction from another account.
The journal format is ideal for recording sales returns. The general format for recording a sales return is:
Sales Return Amount
Accounts receivable/Cash Sales Amount
Amount is the total amount of sales return. Accounts receivable/Cash depends on the type of sale, whether it was a cash sale or a credit sale.
Let us illustrate recording a sales return with examples below.
Pi Fit is a manufacturer and distributor of wearable fitness devices. Its fitness band, Pi Band 4, is affordable and very popular. On March 1st, a sports company Julius Sports ordered 64 Pi Band 4 for its members in an effort to ensure all members keep track of their fitness schedules.
Pi Fit sold each Pi band 4 for $50. Julius Sports paid $3,200 in cash for the fitness bands. However, on March 8th, Julius discovered that 6 of the delivered Pi Band 4 were not charging. Julius Sports, therefore, returned them to Pi Fit for a full refund.
First, calculate the total amount of sales returns.
The price of 1 Pi Band 4 is $50.
Total amount for the returned Pi Band 4 is $50 * 6 = $300
We can now record this information in the journal
Sales Return $300
Cash (Pi Band 4 (Julius Sports)) $300
Another record that will need to be simultaneously updated is the inventory which shows the cost of goods sold. For that purpose, assuming that the cost of making one Pi Band 4 is $25, let us calculate the total cost of making the 6 Pi Band 4.
Total cost of making Pi Band 4 = $25 * 6 = $150.
This information will be recorded in a journal as follows:
Cost of goods sold (Pi Band 4) $150
The above example is for a cash sale. Let us consider another example with a credit sale.
Alice and her husband love picnics and camping. They had planned to go camping with their three children, so they bought 5 foldable chairs from Flap Chairs, a company that makes and distributes foldable chairs, on July 1st. The credit terms for the sale were 2.5/10 net 30. Two days later, at their camp, they realized that one of the chairs was defective. A joint was weak, and as a result, the chair could not support the weight of an adult. The chair was returned to Flap Chairs. Alice and her husband bought the chairs for $70 each.
Let us represent sale return information in a journal.
Since only one chair was returned, the total amount of the sales return was $70.
Sales Return $70
Accounts Receivable (Pi Band 4) $70
The above information will appear as a credit to the accounts receivable because it serves to reduce the total amount of the account receivables.
At the end of the accounting period, both companies will reconcile the sales return account with the cash account and credit account. All entries in the sales return account that were cash sales will be deducted from the cash sales account, while those that were account receivables will be deducted from the credit sales account.
Companies also need a way to discourage customers from returning items. Some companies require an authorization number before accepting returned items from customers. This way, customers who do not have an authorization code will not return items.
All businesses should strive to minimize sales returns because it gives a false sense of income if the sales return happens to cross to the next accounting period. In such a situation, the earlier accounting period will have higher revenue and the latter accounting period will have reduced revenue.