Sales Return Journal Entry

Sales Return Journal Entry Definition

Sales Return in terms of payroll journal entry can be defined as that the one which shall be used to account for the customer returns in the books of account or to account for when there is a return of goods sold by the customer due to defect goods sold, or misfit in requirement of the customer, etc.

Below is the necessary journal entry that shall be passed in the books of account for an accounting of sales return.

#1 – When goods are returned, and no receivables were outstanding.

DateParticularsDebitCredit
1st AprilSales AccountXXX 
              Cash Account XXX
 Inventory AccountXXX 
              Cost of Goods Sold XXX

#2 – When goods are returned, and receivables were outstanding.

DateParticularsDebitCredit
1st AprilSales AccountXXX 
               Receivables Account XXX
 Inventory AccountXXX 
               Cost of Goods Sold XXX

Note

The first entry in the above tables is reducing the sales by sales return, and the second entry is increasing the inventory and adjusting the cost of goods sold.

Examples of Sales Return Journal Entry

Below are the examples of Sales Return Journal Entry –

Example #1

XYZ is operating in retail goods, and when it sells its goods, it is mentioned in their invoice that goods can be returned within 30 days. It has made sales for $50,000,000 for Aug 2019, and it has sold 60% on a cash basis, and rest were sold on a credit basis. The company had $31,000,000 in outstanding receivables and $2,500,000 in cash at the end of Aug 2019 balance sheet. The cost of goods sold was $40,000,000, and the Closing InventoryClosing InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more showed a balance of $22,000,000. 5% of the goods sold were returned due to defective in the product. Further, the company earns a 20% gross margin on sales.

Based on the above information, you are required to pass sales return journal entries and estimated balances that will stay in sales, receivables, cash, inventory, and cost of goods sold.

Solution

We will first compute the sales return amount, which is 5% of the sales of $50,000,000, which shall equal $2,500,000. Now we shall pass journal entries assuming that ratio of 60% was returned in cash and rest on receivables. Therefore, cash account will be credited by 60% of $2,500,000 which shall be $1,500,000 and receivables accounts shall be credited by 40% (100 – 60) of $2,500,000 which shall be $1,000,000.

Further, the inventories shall be reduced by $2,500,000 less than 20% margin, which would be $2,500,000 less than $500,000 that is $2,000,000 that would add to inventory and reduced cost of goods sold by the same.

2.1

Below Entries shall be posted

  1. Sales Return Journal Entry
2.2

2. Adjustment to the Cost of Goods Sold

Sales Return Journal Entry 2.3

Example #2

Cycle and Bike Inc. sell cycle and bike both on cash and credit basis almost equal in ratio. Mr. Vivek, who has gone for internal audit in this company, is drawing out two random samples to validate whether the company is recording journal entries accurately, and the balances are reported should be fair and accurate.

  • 1st Sample: Bike for $55,000 sold to John. John paid the entire amount in cash on 1st September, and due to a defect in the bike, he returned the bike to a company on 20th September. Entire remits due to him were paid him back on the same day.
  • 2nd Sample : 3 cycles sold for $30,000 to Mickey; Mickey paid for one cycle in cash on 4th September, and for rest, the payments were outstanding. The Cycle had some scratches and hence were returned on 6th September, and rest two were retained. Since he has an exceptional amount that was adjusted against the same, and the balance would be received from him.

The Gross margin on bikes was 25%, and on the cycle, they earned 30% on cost. Based on the above information, you are required to pass sales return entries.

Solution

Let’s calculate first the sales return value and adjustment that has to be made to the cost of goods sold.

  • 1st Sample: Sales for $55,000 will be adjusted for 25% gross margin, which can be computed as 55,000 x 25 / 125, which shall equal $11,000, and the amount that will be added to inventory would be $55,000 – $11,000 which is $44,000.
Journal Entry 3

The Journal Entries would be-

Sales Return Journal Entry 3.1
  • 2nd Sample: Sales for $10,000 ($30,000/ 3) will be adjusted for 30% gross margin which can be computed as $10,000 x 30 / 130 which shall equal to 2,308 and the amount that will be added to inventory would be $10,000 – $2,308 which shall be $7,692.
3.4

The Journal Entries would be-

Sales Return 3.2
Journal Entry 3.3

Essential Points about Sales Return Journal Entry

  • Many companies sell goods on either cash basis or credit basis. Hence, the ratio that they maintained should be check, and accordingly, the entry should be passed if the details of the customer are not known.
  • By debiting the Sales account, the revenue of the firm is reduced, and further, that shall impact the gross margin of the company as well.
  • The cost of goods sold is also adjusted as the sales return will increase the inventory. The gross margin should be noted whether it is on cost or sales. If it is on sales, then one can directly reduce sales amount by that margin, but if it’s on cost, then one needs to adjust for weight as well.
  • The cost of goods sold and inventory is adjusted for margin because sales return hasn’t earned any revenue for the firm, and hence profit should also be reversed.

Conclusion

 The accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more shall stand true when revenue is reduced from the Owner’s equity, and Assets are reduced either in the form of cash or accounts receivable. Further, when the inventory and cost of goods sold are adjusted that is one is increase and the second one is decreased all belong to the Owner’s equity and hence the balance sheet is tallied. Sales return should be accounted for a time as there could be cases where the firm might be inflating sales and recording returns in the next accounting period.

This article has been a guide to Sales Return Journal Entry. Here we discuss the most common type of journal entries for sales return along with practical examples. You can learn more about finance from the following articles –