Question

What are the steps to record an end of period adjustment for credit sales with returns and allowances?

Answer 1

Steps to record an end of period adjustment for credit sales with returns and allowances:-

Accounting for a sales return involves reversing

(1) the revenue recorded at the time of original sale, and

(2) the related cost of goods sold.

Step 1:-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 the customer at selling price for the units sold, so we need to reduce the accounts receivable by the correct amount. Here's an example:

Sales $ 800,000

Less: Sales Discounts 80,000

Sales Return & Allowances 10,000

Net Sales $ 710,000

When only "Net Sales" is presented in the income statement, its computation is shown in notes to financial statements

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 Companies generally likes to be on top of how much stuff is being returned and how much in allowances the sales representatives are granting. Processing returns is costly, and management likes to see the returns and allowances item going down.

Journal Entries fo Sales Returns & Allowances

Sales Returns and Allowances Dr $10,000

Accounts Receivable CR $ 10,000

Note: Some companies do not maintain a 'Sales Returns and Allowances" account. They record customer returns by directly debiting "Sales". However, it is good to maintain the aforementioned account to be able to track returns and allowances and make decisions about them if necessary.

Step 2:- Next thing we need to do is to put the units returned back in our inventory so we can sell them to another customer . The second journal entry looks like this

Inventory Dr $7,000

Cost of Goods Sold CR $ 7,000

The credit to cost of goods sold completes the reversal of the sale.