‘Tis the season for purchase returns … all year long. Due to the fact that if girlfriend sell commodities at her business, you understand that not all customers are satisfied. If a customer desires to bring earlier an item, you must make sales returns and allowances journal entries.

Returns room a normal part of running a business. Yet if you nothing know how to account because that a return with a acquisition returns and allowances journal entry, your publications will be inaccurate. 

Not rather sure just how to carry out it? That’s whereby your friends in ~ Patriot come in. We’ll walk you with the process—step by step.

What is a purchase return? 

A acquisition return, or sales return, is once a customer brings ago a product castle bought from a business, either because that a refund or exchange. No matter how good your products are, you’re tied to have purchase return at some point or another.

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A customer could return things for number of reasons. Perhaps the customer:

Bought an ext than castle neededBought the wrong productFound a better-priced great elsewhereReceived the dorn goodReceived a damaged good

How you handle purchase returns depends on your tiny business return policy. You can offer totally free returns, charge a restocking fee, expropriate returns only with a receipt, or not accept returns at all. Or, probably you decide to compensate customers returning items with keep credit. 

In many cases, the customer receives a refund once they physical return the good. Friend can likewise lay out a return time structure in her payment terms and also conditions. 

OK, therefore those space the basics of what sales returns are. Currently onto the recordkeeping part—accounting because that the return in your books…

The basics that sales returns and also allowances 

When a client buys something because that you, girlfriend (should) document the transaction in your books by making a sales journal entry. So, when a customer returns something come you, you have to reverse this accounts with debits and also credits. 

Debits increase some accounts and also decrease others. The same is true because that credits. Debits and also credits are equal and opposite, so when you rise an account making use of a debit, you have to decrease another with a credit. 

You can use the following chart come see exactly how debits and credits affect each account: 

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So, what is the purchase return account you need to understand about? Well, there room a few accounts you might be taking care of when a customer return merchandise:

Sales returns and also allowancesCashInventory Cost of items sold

Creating a sales return and allowances newspaper entry

Accounting because that sales returns can be tricky. But, nothing be overwhelmed through debits and credits. As soon as you obtain the hang of which accounts to increase and also decrease, you can record purchase returns and allowances in your books.

Your responsibilities depend on just how the original purchase was made and also how you arrangement on reimbursing the customer. 

But, nevertheless of exactly how the customer paid, one thing stays the same: you need to update her Sales Returns and Allowances account. This account to represent returned goods at your business. 

The Sales Returns and also Allowances account is a contra revenue account, an interpretation it opposes the revenue account from the early stage purchase. You have to debit the Sales Returns and Allowances account to show a diminish in revenue. 

Ready to account for a purchase return in your audit books? 

Purchase returns for when a customer payment cash

If her customer paid in cash, you physically received the money at the suggest of sale. For this reason now, you have to decide how you’re refunding the customer: cash or credit?

Cash refunds

So, you’ve made decision to offer the customer earlier the money they provided to pay for your product. You already know that you need to debit your Sales Returns and also Allowances account. Now, which account come credit? 

If a client made a cash purchase, to decrease the Cash account v a credit. This purchase allowance newspaper entry lowers your net sales.

Your sales returns and also allowances newspaper entry must look favor this:

DateAccountNotesDebitCredit
XX/XX/XXXXSales Returns and also AllowancesSales returnX
CashX
Store credit

Rather than refunding a customer v cash, you could credit goods at your business. Bookkeeping for a acquisition return with save credit is comparable to a cash refund. Yet instead of entering in your Cash account, you credit transaction your account Payable account.

Because you are not immediately paying the customer, you must rise the amount you owe with an account Payable entry. This increases your liabilities.

Your sales returns and allowances newspaper entry need to look favor this:

DateAccountNotesDebitCredit
XX/XX/XXXXSales Returns and also AllowancesSales returnX
Accounts PayableX

Sales returns for when a customer used store credit

If a customer originally made their acquisition on credit, the revenue was part of her accounts receivable, which is money fan to you by customers.

Recording a acquisition return for a revenue made on credit transaction is a tiny different than as soon as a customer payment cash.

If the customer’s initial purchase was made utilizing credit, you taped the original sale by raising your accounts Receivable account through a debit.

When a customer return something they paid for v credit, her Accounts union account decreases. Reverse the original journal entry by crediting her Accounts union account. Although girlfriend don’t shed physical cash, you lose the amount you to be going come receive.

DateAccountNotesDebitCredit
XX/XX/XXXXSales Returns and also AllowancesSales returnX
Accounts ReceivableX

One an ext thing … Inventory

When audit for sales returns, girlfriend should additionally record the rise in inventory, if applicable (e.g., if girlfriend don’t litter the an excellent away).

To update your inventory, debit her Inventory account come reflect the boost in assets. And, credit your price of products Sold account come reflect the diminish in your price of products sold.

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Your perform record need to look something like this:

DateAccountNotesDebitCredit
XX/XX/XXXXInventorySales returnX
Cost of products SoldX

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This write-up has been updated indigenous its original publication day of April 20, 2017.