Sales return definition
/What is a Sales Return?
A sales return is merchandise sent back by a buyer to the seller. The return is usually because an excess quantity was either ordered or shipped, or due to defective goods. A return may also be triggered by goods having been shipped too late, or the wrong items were shipped, or because the product specifications were incorrect.
Accounting for a Sales Return
The seller records this return as a debit to a Sales Returns account and a credit to the Accounts Receivable account; the total amount of sales returns in this account is a deduction from the reported amount of gross sales in a period, which yields a net sales figure. The credit to the Accounts Receivable account reduces the amount of accounts receivable outstanding.
The Sales Returns account is a contra account .
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Profit Impact of Sales Returns
It is possible that a sales return will not be authorized until a later period than the one in which the original sale transaction was completed. If so, there will be an excessive amount of revenue recognized in the original reporting period , with the offsetting sales reduction appearing in a later reporting period. This overstates profits in the first period and understates profits in the later period.
How to Control Sales Returns
A seller can more closely control the amount of sales returns by requiring a sales return authorization number before its receiving department will accept a return. Otherwise, some customers will return goods with impunity, some of which may be damaged and which can therefore not be re-sold.
