What is Sales Return in Accounting? Step-by-Step Guide

Sales Return is a commonly used term in the merchandise or eCommerce industry. It usually comes into the picture when the customers return their purchase order and request a refund. 

Let’s deep dive to understand the defect concept in detail. 

What is Sales return in Accounting? 

When a customer returns the purchased item and requests a refund, the actual sales are reduced. The refund is either credited to their account or given in cash. In accounting, these returned items are called sales returns or return inwards. 

Return on sales is a crucial part of the sales process. It encourages the company to be consistent in producing high-quality products. 

What is a Sales Return Journal Entry? 

When the customer returns the purchased items to the seller or supplier, the transaction details are noted. The records or documents where these details are recorded are termed sales return journals. For returned items, an entry is made in this book or document, which is known as a sales return journal entry.  

Why is it essential to record Return on Sales? 

Returns are recorded to track the financial or sales performance that derives important business decisions. Here’s how it helps:

1. Analyze Profits: 

Sales returns impact a company’s financial performance and profits. When customers return items, they request replacements or refunds. This changes the company’s profit levels. Thus, tracking these returns helps the company monitor and analyze profits. 

2. Identify Trends

Analyzing customer returns helps companies evaluate locations, seasons, and categories of products that perform well for each period. If one retail location has more returns for a particular item, the product and sales team can explore the cause and make adjustments in the business.  

3. Product Enhancements

The company leverages sales returns to understand the reasons for items being returned. This helps the company improve its products to make them customer-centric and reduce return on sales. 

Sales Returns Vs Sales Allowance 

Sales return occurs when the customer returns the product and requests a refund. Sales allowance occurs when the customer receives a defective product, and the owner offers an allowance.  

For sales returns, the product is returned to the seller, and the seller refunds the product price to the customer. Instead of returning the product, sales allowance is where customers negotiate a low price for the defective product.  

Sales return is recorded as a reduction in sales and inventory, and sales allowance is recorded as a reduction in sales. 

How to Record Return on Sales? 

1. List and Record the Return 

• Recording return on sales initially starts with recording the customer’s return funds and source of payments. 
• Store credit refers to the compensation a customer receives instead of cash back when returning the order. 
• Identifying how the customer paid for the product helps with sales returns and transactions. 

2.  Verify the company policies 

• Product return and replacements are bound to company policies. 
• While accepting the returned product, verify that the policies are being met. 
• These include checking if the product is unused, if the tags are not removed, if the return is within the allotted time, etc. 
• If these conditions are not satisfied, the product return is canceled. 

3. Record Sales Transaction

• The company can leverage the return on sales information to record sales from the accounts. 
• Cash and credit sales transactions can be recorded in the sales returns and allowances account. 
• Cash refunds reflect reductions in the cash account. 
• Returns on credit decrease accounts receivable. 

4. Record Sales allowance 

• Sales allowance is the deduction from the original price of the defective products that customers agree to buy. 
• Maintain a record of the faulty products and the price at which they were bought. 

5. Record Credit Notes 
   • All the credit notes are recorded in the credit register for return on sales. 
   • The credit notes register presents the monthly breakdown credits for the purchased item. 
   • The credit notes provide evidence of the payable balance and amount the customer owes for returned items. 
6. Update Inventory

• The returned items are normally pushed to the company’s warehouse or inventory. 
• If the item returned by the customer is undamaged, the retail store will revamp its packaging to resell it. 
• Adding the item to the warehouse records will decrease the loss incurred due to return on sales. 

Let’s Conclude 

The sales return guide was helpful to you. If you have any queries, shoot them in the comment section below. We will surely answer them. Stay tuned for more informative blogs. 

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FAQs

• What are the reasons for return on sales? 
  • Defective or damaged products. 
  • Shipping delays. 
  • Unmatched customer expectations. 

• How to control sales return? 
  • Improve the quality of the product to minimize returns. 
  • Present the benefits and features accurately. 
  • Specify the size and quantity appropriately. 
  • Get customer reviews and feedback for product enhancements. 
  • Ensure timely delivery of the product.
  • Pack the items properly. 

• What is the difference between sales return and purchase return? 

Sales returns are issued by the customer to the seller. Purchase returns are issued by the suppliers on originally purchased products for resale.