Accounting for Sales Return: Journal Entries and Example

In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. Sales Discounts is a contra revenue account that records the value of price reductions granted to buyers in order to incentivize early payments. Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days. The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. Normally sales returns and allowances are two different kinds of transactions.

• Make sure you track each type of contra revenue carefully to maintain precise records that can then inform your business decisions and help you spot trends or issues in sales processes, product quality, or pricing strategies.
• By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
• He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.
• Sales revenue is the income statement account, and it is recognized when the control is passed to customers.
• However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances.
• In this article, we cover the accounting for sales returns and allowances; especially the sales returns and allowances journal entry under both periodic and perpetual inventory systems.

Balance Sheet

• 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.
• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• When the above entry was posted to the accounts receivable ledger, a small checkmark was made to the right of the diagonal line.
• If this is part of your business model, you’ll want to record every refund, return or discount in your contra revenue account to help you better understand the differences between your gross revenue and the net revenue.
• (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts.

It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account. Better yet, consider investing in AI-powered accounting software to reduce mistakes. On Feb 2, the journal entry to adjust inventory and record cost of goods sold account. Since this is the credit sales, the company contra expense account needs to account for the account receivable by debit in the amount of USD875 and credit to sale account USD500 and USD375 and giving the total of USD875. Show the general entries to record sales and sales return in the books of ABC cosmetics. The difference between an asset’s account balance and the contra account balance is known as the book value.

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The seller usually issues the customer a credit memorandum showing the amount of credit granted and the reason for the return. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. The ABC cosmetics purchase product Y at $40 per piece and product Z at $20.

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Businesses leverage contra-revenue accounts to distinguish between net and gross revenue. While transactions may be recorded in one or more arrangements, the typical balance is a debit, contrasting with the usual credit balance in a standard sales account. Calculating contra revenue involves a straightforward deduction of gross sales from net sales. In the seller’s books, a return or allowance is recorded as a reduction in sales revenue. Since the sales account normally has a credit balance, returns and allowances could be recorded on the debit side (the reduction side) of the sales account.

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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. No matter how great your products are, you’re bound to have purchase returns at some point or another. Mismanagement of contra-revenue accounts can lead to inaccuracies in financial reporting and affect a company’s profitability. It’s crucial to have accurate records to make informed business decisions. Overshooting in sales is caused due to overstating of sales returns and allowances. It is important to realize that unearned revenue is not a contra revenues account.

The sale return account is created for recording the sale that is returning from the customer. It is the contra entries of the sales account, increasing in debit and decreasing in credit. The main reason that is recording in debit while the sales return happened is that this account will decrease the total sale revenue. ​​​​​​As we can see from the journal entries above, the seller should debit the exact amount of return to the revenue account or the sales return allowance account once the sale is returned. This sales return allowance account is the contra account to the sales revenue account. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.

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Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. These deductions, which come in the form of sales returns, allowances, and discounts, are not expenses but adjustments that lower the total sales on your income statement. Once you get the hang of which accounts to increase and decrease, you can record purchase returns and allowances in your books.