Sales returns and allowances

What is sales returns and allowances?

The sales returns and allowances is a contra revenue account with a normal debit balance used to record returns from and allowances to customers. It thus has a debit balance that is opposite the credit balance of the Sales account.

What is the sales returns and allowances journal?

When sales are returned by customers or an allowance is granted to them on account of short delivery, breakage or low quality, etc., the entry is made in sales returns and allowances journal. Return of merchandise sold for cash is entered in cash payment journal or cash book.

Explanation

A return results when a buyer returns part, or all, of purchase to the seller. An allowance results when a buyer decides to keep damaged or defective goods, but at a reduction from the original price.

On the books of the seller, 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. To provide a better record, however, returns and allowances are often recorded in a separate account entitled Sales Returns and Allowances.

How to record Sales returns and Allowances

When merchandise are returned by customer or allowance is granted to them a credit memorandum (also known as credit memo) is prepared. It is prepared in duplicate, the original memo is sent to the customer and the duplicate copy is retained. A credit memo serves as a voucher for entries in the sales returns and allowances journal. Like debit memos, all credit memos are serially numbered. This can be illustrated as follows:

Format-of-sales-returns-and-allowances

Goods sold on credit are often returned to the seller with the understanding that the customer’s account will be credited (reduced) by the amount of the return. The seller usually issues the customer a credit memorandum that shows the amount of credit granted and the reason for the return. On the books of the seller, the customer’s accounts receivable account has a debit balance. Thus, the term credit memorandum indicates that the seller has decreased the customer’s account and does not expect payment.

To illustrate, Lakeside Electronics issued the credit memorandum shown in the below figure to Champ’s TV Sales for the return of a 19-inch color TV that proved to be defective.

Credit-Memorandum

Lakeside used the credit memorandum in the above figure as a source document for the following general journal entry.

Journal-entry-for-the-source-document

The credit part of this entry involves both a controlling account (Accounts Receivable) in the general ledger and a customer’s account (Champ’s TV Sales) in the accounts receivable subsidiary ledger. As we have learned, debits or credits to a controlling account require a dual posting to the controlling account in the general ledger and to the customer’s account in the accounts receivable ledger. To indicate that dual posting is necessary, a diagonal line is drawn in the P.R. column of the journal at the time the journal entry is made.

When the above entry was posted to the accounts receivable ledger, a small check mark was made to the right of the diagonal line, When posting was made to the Accounts Receivable controlling account, the account number of Accounts Receivable (112) was written to the left of the diagonal line.

If a cash refund is made because of a sales return or allowance, the Sale Returns and Allowances account is debited and the Cash account is credited. Cash refunds are recorded in the cash payment journal.

Format of sales returns and allowances journal

Format of sales returns and allowances journal is shown below:

sales-returns-and-allowances-journal-img1

(1). Date column is used to record the date on which customers return merchandise sold to them.

(2). Account credited column is used to record the account title of the customer whose account is credited for the return of merchandise.

(3). Credit memo No. Column is used to record the credit memorandum number related to the merchandise returned.

(4). Posting reference column is used to record the account number at the time of posting entries from sales returns and allowances journal to ledger accounts.

(5). Amount column is used to record the amount of merchandise returned by customer.

Posting entries from sales returns and allowances journal to ledger accounts

Entries from sales returns and allowances journal are posted to relevant accounts in the accounts payable subsidiary ledger and general ledger. The procedure is described below:

  1. The individual entries in the sales returns and allowances journal are posted as credits to their respective accounts in the accounts receivable subsidiary ledger.
  2. The total of sales returns and allowances journal is posted as debit to the sales returns and allowances account and as credit to the accounts receivable account in the general ledger.

Example

Record the following transactions in the sales journal and sales returns and allowances journal and post to ledger accounts.

Year: 2016
Apr. 01:
Sold merchandise on account to Al-Habib Co. $875, invoice No. 744.
Apr. 05: Sold merchandise to on account to Green Brothers $1,780, invoice no. 745.
Apr. 08: Merchandise returned by Al-Habib Co. $50, credit memo no. 42 is issued.
Apr. 14: Sold merchandise on account to Star Brothers $1,285, invoice no. 746.
Apr. 19: Merchandise returned by Green brothers $100, credit memo no. 43 is issued.
Apr. 25: Issued credit memo no. 44 of $120 to Star Brothers for defective merchandise returned by them.

Solution

Sales journal and sales returns and allowances journal:

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Accounts payable subsidiary ledger:

sales-returns-journal-img4

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General ledger:

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