‘Tis the season for purchase returns … all year long. Since if girlfriend sell commodities at your business, you recognize that no all customers space satisfied. If a customer desires to bring earlier an item, you have to make sales returns and also allowances newspaper entries.

Returns space a normal component of to run a business. But if you nothing know exactly how to account for a return with a acquisition returns and allowances journal entry, your publications will be inaccurate. 

Not fairly sure how to do it? That’s where your friends at Patriot come in. We’ll walk you with the process—step by step.

What is a acquisition return? 

A acquisition return, or sales return, is when a customer brings ago a product lock bought from a business, either for a refund or exchange. No issue how great your products are, you’re tied to have purchase returns at some allude or another.

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A customer might return an item for number of reasons. Possibly the customer:

Bought an ext than castle neededBought the dorn productFound a better-priced good elsewhereReceived the not correct goodReceived a damaged good

How you take care of purchase returns relies on your little business return policy. You might offer free returns, fee a restocking fee, accept returns just with a receipt, or not accept return at all. Or, maybe you decision to compensate client returning items with keep credit. 

In many cases, the customer receives a refund once they physically return the good. Friend can additionally lay out a return time framework in your payment terms and conditions. 

OK, for this reason those are the basics that what sales returns are. Currently onto the recordkeeping part—accounting because that the return in her books…

The basics the sales returns and allowances 

When a client buys something because that you, friend (should) record the transaction in your publications by make a sales journal entry. So, once a customer returns something come you, you must reverse these accounts with debits and credits. 

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

You can use the complying with chart come see how debits and credits impact each account: 

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So, what is the purchase return account you require to recognize about? Well, there space a couple of accounts you may be managing when a customer return merchandise:

Sales returns and also allowancesCashInventory Cost of items sold

Creating a sales return and also allowances newspaper entry

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

Your responsibilities count on exactly how the original purchase was made and how you plan on reimbursing the customer. 

But, regardless of how the customer paid, one thing stays the same: you should update her Sales Returns and Allowances account. This account to represent returned items at her business. 

The Sales Returns and also Allowances account is a contra revenue account, definition it opposes the revenue account native the initial purchase. You should debit the Sales Returns and Allowances account to display a to decrease in revenue. 

Ready to account because that a acquisition return in your bookkeeping books? 

Purchase returns for when a customer paid cash

If her customer paid in cash, friend physically received the money in ~ the allude of sale. For this reason now, you must decide just how you’re refunding the customer: cash or credit?

Cash refunds

So, you’ve decided to provide the customer ago the money they used to pay for your product. You already know the you must debit her Sales Returns and also Allowances account. Now, i m sorry account come credit? 

If a customer made a cash purchase, decrease the Cash account with a credit. This acquisition allowance journal entry lowers your net sales.

Your sales returns and allowances newspaper entry have to look prefer this:

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

Rather than refunding a customer v cash, you could credit merchandise at your business. Accounting for a purchase return with keep credit is similar to a cash refund. Yet instead of start in her Cash account, you credit your accounts Payable account.

Because you room not automatically paying the customer, girlfriend must boost the amount friend owe through an account Payable entry. This rises your liabilities.

Your sales returns and allowances newspaper entry must look prefer this:

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

Sales return for once a customer provided store credit

If a customer initially made their purchase on credit, the sale was component of your accounts receivable, which is money owed to girlfriend by customers.

Recording a acquisition return because that a sale made on credit transaction is a small different than as soon as a customer payment cash.

If the customer’s initial purchase was made using credit, you recorded the original sale by enhancing your accounts Receivable account v a debit.

When a customer returns something they paid for with credit, her Accounts unification account decreases. Turning back the original journal entrance by crediting her Accounts unification account. Although girlfriend don’t lose physical cash, you shed the lot you were going come receive.

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

One an ext thing … Inventory

When accountancy for sales returns, you should also record the rise in inventory, if applicable (e.g., if girlfriend don’t throw the good away).

To update your inventory, debit her Inventory account come reflect the boost in assets. And, credit transaction your cost of items Sold account come reflect the decrease in your expense of products sold.

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Your list record should look something prefer this:

DateAccountNotesDebitCredit
XX/XX/XXXXInventorySales returnX
Cost of items SoldX

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