A customer makes a sales return by sending goods back to your business. The goods have a sales value of 1,000 and had been sold to the customer on account, the balance due remains outstanding in the accounts receivable (trade debtors) account of the customer.
A sales return, sometimes called a returns inwards, is recorded in the accounting records as follows:
Journal Entry for a Sales Return
The accounting records will show the following bookkeeping entries for the sales return of inventory:
Sales Return Bookkeeping Entries Explained
The goods are returned and the asset of inventory increases. The debit to sales returns reduces the value of sales and at the end of the accounting period, will reduce the sales credited to the income statement.
The amount owed by the customer would have been sitting as a debit on the accounts receivable account. The credit above cancels the amount due and returns the customers balance to zero.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case one asset (accounts receivable) decreases as the money owed by the customer is cancelled, this reduction is balanced by the decrease in owners equity. The debit to the income statement for the sales return decreases the profit which decreases the retained earnings and therefore the owners equity in the business.
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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.