Sales Returns & Allowances Journal Entries

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  • 0:04 Sales Returns
  • 1:10 Sales Returns Journal Entries
  • 2:23 Allowances Journal Entries
  • 3:28 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

This lesson introduces you to the sales returns and allowances account. Journal entries for this account allows returns and allowances to be tracked and reveal trends. Easy-to-follow examples illustrate these journal entries.

Sales Returns

Let's say your friend Rick is a staff accountant for Star Sporting Goods. They carry a full line of sports equipment that they sell to consumers and directly to sports teams. Things get pretty crazy around this time of year as baseball season is starting up and they're doing lots of sales to teams. The teams save money since they get big discounts, so this side of the business is booming. However, when rushing around with so many orders, mistakes are going to happen. Today Rick is going through some orders where either wrong or defective merchandise was sent out to teams. He's going to process them on the accounting system and do the journal entries. This stack is getting pretty big, so let's get started!

The first item is from the Thumpers, a softball team. It looks like they were sent baseballs instead of softballs. Because of this, the Star sales rep rush ordered them softballs, and the team agreed to return the baseballs. The baseballs came back today, so let's put this entry in the system. We're going to need to do two things, and it's important to do them both at the same time or we will just end up with more mistakes.

Sales Returns Journal Entries

The first thing that needs to be done is to reverse the sale. Then, we need to correct the team's credit account so they are not paying double. We charged them $2.00 each for 100 baseballs, so we need to reduce the accounts receivable by the correct amount. The journal entry looks like this:

Returns 1

Sales returns and allowances are what is called a contra revenue account. It'll reduce the amount of sales since the goods were returned, but keep the amount separate. We use this account because Star management likes to be on top of how much stuff is being returned and how much in allowances the sales reps are granting. Processing returns is costly, and management likes to see the returns and allowances item going down.

If the customer wants a cash refund, we can just credit cash rather than accounts receivable. The debit entry is the same.

The other thing we need to do is to put the baseballs back in our inventory so we can sell them to a team that needs them. Star's cost for the baseballs is $1.50 each. The second journal entry looks like this table:

Returns 2

As you can see, the cost of goods sold, with $1.50 per baseball, is $150. The credit to cost of goods sold completes the reversal of the sale.

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