In the accounting world, each account has a normal balance—either debit or credit. For sales returns and allowances, the normal balance is on the credit side. This might seem counterintuitive at first, as one would expect returns to be a negative aspect of revenue. However, this accounting convention allows for a clear representation of reductions in sales revenue. Like other contra accounts, the contra revenue account goes against revenues in the income statement.

• It is a contra-revenue account with a debit balance that reduces the credit balance of the gross sales revenue on the company’s income statement.
• And, credit your Cost of Goods Sold account to reflect the decrease in your cost of goods sold.
• The original sales journal entry is the same as the periodic inventory system.
• The credit to purchase returns and allowances reduces the value of the scratched bags when they are added to the inventory.
• Accounts, such as earned interest, sales discounts, and sales returns, are considered temporary accounts for accounting purposes.

Revenue, for instance, is the total amount of income realized from the sale of goods and services which is responsible for an increase in equity. Hence, the normal balance for revenue would be a credit balance which is increased by a credit entry and decreased by a debit entry. Sales returns, allowances, and discounts are the three main costs that can affect net sales.

• For companies using cash accounting they are booked when cash is received.
• This allowance should not be confused with sales discount which is initially entered in cash receipts journal at the time of receiving cash from buyers.
• Sales returns occur when a customer returns goods to the seller due to some fault, while the term sales allowance is used when the buyer agrees to keep the products, but for a lesser price.
• The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account.
• In exchange, the company will compensate the customers by repaying them or selling them other products.

Purchase Return Journal Entry

As a contra-revenue account, the sales returns and allowances account opposes the revenue account from the initial purchase. Sales returns and allowances is a contra revenue account with a normal debit balance used to record returns from and allowances to customers. The account, therefore, has a debit balance that is opposite the credit balance of the sales account.

A seller would need to debit an expense account and credit an asset account. Another difference between the two lies in how they are recorded in the financial statements. Discounts allowed represent a debit or expense, while discount received are registered as a credit or income. Both discounts allowed and discounts received can be further divided into trade and cash discounts.

How to Record Sales Returns and Allowances? (Explanation and Journal Entries)

When a buyer pays the bill within the discount period, accountants debit cash and credit accounts receivable. The sales returns and allowances journal is a special journal maintained to record the return of inventory from buyers or any allowance granted to them. AccountDebitCreditSales Returns and AllowancesXAccounts ReceivableXThe entries show that as your returns increase, your assets decrease. You need to record a sales return journal entry in your accounting books. To account for a return, reverse the revenue and cost of the good recorded in the original sale. In accounting parlance, nominal accounts are transactions that report revenues, expenses, gains and losses.

Nominal accounts are closed at the end of each accounting year to allow such accounts to start the next accounting year with zero balances. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. A purchase return, or sales return, is when a customer brings back a product they bought from a business, either for a refund or exchange.

When preparing an income statement, the amount in the sales return allowance is deducted from the total sales to calculate the company’s actual sales/net sales. We will need to keep the returned goods in the company’s warehouse and reflect this transaction correctly in the accounting records. On Feb 5, journal entry to record the sales return and the buyer’s account adjustment. If it were the credit sales, then we should credit to the account receivable account. If the sales were cash sales, we should credit them to the cash or bank account since the company will need to pay back to the customer.

They are used to record product returns and allowances issued to customers. For this, businesses deduct the amount identified under the returns and allowances head from the gross sales figure, and the net sales figure is derived from this calculation. Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance.

In such cases, it is expedient for businesses to keep track of these sales returns so that they can keep their accounting records up to date. This will help in eliminating any errors in the financial statements and records. Since sales returns and allowance are debited from gross sales, it has a negative balance.

Once ordered, companies may deliver the goods or request customers to get those goods is sales returns and allowances a debit or credit from a warehouse. Let’s assume that ABC Co sells goods to its customer on 05 January 20X1 for $2,500. In the sales agreement, ABC Co would accept the sales return if the goods are damaged or defective. On 07 January 20X1, the customer finds out that some of the goods received are defective.

Sales Returns and Allowances Journal Entry under the Periodic Inventory System

Credits decrease asset and expense accounts, and increase revenue, liability and shareholders’ equity accounts. Debits and credits increase and decrease the “sales returns and allowances” account, respectively, because it is a contra account that reduces the sales amount on the income statement. We now offer eight Certificates of Achievement for Introductory Accounting and Bookkeeping. Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets.

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On 5th Feb 2020, the customer returned 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics. Some of the reasons why customers may return goods will include the following. So once this entry is posted, inventory will be increased, and the cost of goods sold will be derecognized. Suppose a customer bought a leather jacket from Jill, a shop owner, for $300.

Sales Return without Allowance Account

A contra-revenue account is a liability from revenue which helps in determining whether to omit certain sales transactions, which would otherwise be mistaken as revenue. It is usually included if there are any sales returns and allowances or other type of return not recorded in the sales journal. Whatever the case it is, the aim at which the customer returns the good is to receive a refund. When this happens, it is expedient for businesses to keep track of sales returns in order to keep their accounting records up to date. As shown above, this journal entry involves recording a debit of $3,500 in the sales returns and allowances as well as recording a credit in an accounts receivable account. Therefore, a journal entry will also need to be made to account for the goods returning to inventory and the cost of goods sold.

This line item is the aggregation of two general ledger accounts, which are the sales returns account and the sales allowances account. Both of these accounts are contra accounts, which means that they offset gross sales. The natural balance in these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account. This entry is made when a refund is received from supplier for merchandise returned to him. The sales returns and allowances account is known as a contra revenue account. When items are returned or allowances granted, it allows management to track the amounts and look for trends.

This would involve recording a debit in the inventory account as well as recording a credit in the cost of goods sold (COGS) account. A second entry must also be made debiting inventory to put the returned items back. No matter how great your products are, you’re bound to have purchase returns at some point or another. Credit memos serve as vouchers for entries in the sales returns and allowances journal. When sales are returned by customers or an allowance is granted to them due to delayed delivery, breakage, or quality issues, an entry is made in the sales returns and allowances journal.

In this case, the customers do not need to return goods back to the company. However, the company still need to make allowance for such transactions in their accounting system. This is because the initial accounting journal entry at the time of sale was a debit to Accounts Receivable asset account and credit to a Sales Revenue account. So when the company’s warehouse physically receives the goods, the inventory account will be debited to increase the asset, and the cost of goods sold will be credited. Companies report sales return and allowance separately from sales for two main reasons.