Sales return definition
/What is a Sales Return?
A sales return is merchandise sent back by a buyer to the seller. There are several possible reasons for a sales return, including the following:
An excess quantity was either ordered or shipped
The goods were defective
The goods were in the wrong size
The goods were shipped too early or too late
The wrong items were shipped
Accounting for a Sales Return
The seller records a sales return as a debit to a Sales Returns account and a credit to the Accounts Receivable account; the total amount of sales returns in this account is a deduction from the reported amount of gross sales in a period, which yields a net sales figure. The credit to the Accounts Receivable account reduces the amount of accounts receivable outstanding. A sample journal entry for a $100 sales return appears next.
The Sales Returns account is a contra account.
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Profit Impact of Sales Returns
It is possible that a sales return will not be authorized until a later period than the one in which the original sale transaction was completed. If so, there will be an excessive amount of revenue recognized in the original reporting period, with the offsetting sales reduction appearing in a later reporting period. This overstates profits in the first period and understates profits in the later period. You can avoid this issue by recording a reserve for sales returns in the period in which the sale occurred.
How to Control Sales Returns
You can more closely control the amount of sales returns by requiring a sales return authorization number before your receiving department will accept a return. Otherwise, some customers will return goods with impunity, some of which may be damaged and which can therefore not be re-sold. This is a particular concern when you are selling to retailers, since they may attempt to return pallet-loads of goods that they are not able to sell.