In some occasions, business (Also see How to Track the Expenses and the Benefits It Brings to Your Business) owners may encounter a situation where the goods they receive from their suppliers may be defective, or the merchandise are not what they want. If this happens, they will return those goods to the supplier. From the perspective of the supplier or seller, the goods that their customers return to them are the sales return. When they receive the sales return, they should make the corresponding adjustments in their books of accounts by using the journal entries for sales return.
Sales return can happen under two situations, either the customer has settled all the payments, or there are still some outstanding receivables. These situations require different accounting treatment, and some business owners may not be sure about how they should record such transactions. In this case, hiring an accounting firm in Johor Bahru would be a smart move as business owners may do the records wrongly or they may just ignore such transactions as they do not know much about accounting. However, such actions will bring serious consequences to the company’s financial statements in the long run.
If the company receives the sales returns, and there are no outstanding receivables, the company should debit the sales account with the value of goods returned and credit its cash account with the same amount. The return of goods will also cause an increase in the inventory account, as well as a decrease in the cost of goods sold.
The accounting (Also see What Are Accounting Concepts and Accounting Conventions?) treatment for the sales return with outstanding receivables is mostly the same as the treatment in the case that does not have outstanding receivables. The company should still debit the sales account, but instead of crediting the cash account, it should credit the receivables account. Then, similar to the case above, the company needs to increase the amount of inventories it has on hand and reduce the amount of cost of goods sold.
Why should the journal entries mentioned above be made by the supplier if there is a sales return? A sales return will cause the sales that the company has actually made to decrease, and this is why the debit entry in the sales account is needed as the entry will reduce the revenue of the company. Thus, this entry will bring an impact to the company’s gross margin. Besides, as the sales return will cause the company’s inventory to increase, business owners should make corresponding adjustments on the cost of goods sold too.
In short, the journal entries for sales return has proved that the accounting equation is true. The accounting equation states the assets that the company owns will be equal to the sum of a company’s liabilities and equity. This shows that if there is an increase in the left side of the equation, the right side will increase too, and vice versa. In the case of a sales return, there is a reduction in cash or accounts receivable, which is the company’s asset, and the revenue that makes up part of the owner’s equity will reduce too. Thus, business owners should treat issues regarding sales returns seriously and do regular assessments on the inventories and cost of goods sold to ensure the accuracy of accounting records.