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Recording Sales Returns and Allowances for Your Business

Bookkeeping can become pretty confusing if you incorrectly record sales returns, gift card sales, and returns bought with a discount. Most stores deal with sales returns and sales allowances (sales incentive programs) on a regular basis. It’s common for customers to return items they’ve purchased because the item is defective, they’ve changed their minds, or for any other reason.

Instituting a no-return policy is guaranteed to produce very unhappy customers, so to maintain good customer relations, you should allow sales returns.

Recording gift card sales

Sales allowances are becoming more popular with businesses. Sales allowances are most often in the form of a gift card. A gift card that’s sold is actually a liability for the company because the company has received cash, but no merchandise has gone out.

Gift card sales are entered in a Gift Card liability account. When a customer makes a purchase at a later date using the gift card, the Gift Card liability account is reduced by the purchase amount. Monitoring the Gift Card liability account allows businesses to keep track of how much is yet to be sold without receiving additional cash.

Recording sales returns

Accepting sales returns can be a more complicated process than accepting sales allowances. Usually, a business posts a set of rules for returns that may include:

  • Returns will only be allowed within 30 days of purchase.

  • You must have a receipt to return an item.

  • If you return an item without a receipt, you can receive only store credit.

You can set up whatever rules you want for returns. For internal control purposes, the key to returns is monitoring how your staff handles them. In most cases, you should require a manager’s approval on returns. Also, be sure your staff pays close attention to how the customer originally paid for the item being returned. You certainly don’t want to give a customer cash if she paid on store credit — that’s just handing over your money!

After a return is approved, the cashier either returns the amount paid by cash or credit card. Customers who bought the items on store credit don’t get any money back. That’s because they didn’t pay anything when they purchased the item, but expected to be billed later. Instead, a form is filled out so that the amount of the original purchase can be subtracted from the customer’s store credit account.

You use the information collected by the cashier who handled the return to input the sales return data into the books. For example, a customer returns a $40 item that was purchased with cash.

You record the cash refund in the Cash Receipts Journal like this:

Debit Credit
Sales Returns and Allowances $40.00
Sales Taxes Collected @ 6% $2.40
Cash in Checking $42.40
To record return of purchase, 4/30

Recording sales returns bought with a discount

If an item had been bought with a discount and is being returned, the bookkeeping method is to list the discount, in addition to the debit and credit, and adjust the price to show that discount.

In the preceding journal entry (from the section "Recording Sales Returns"):

  • The Sales Returns and Allowances account increases. This account normally carries a debit balance and is subtracted from Sales when preparing the income statement, thereby reducing revenue received from customers.

  • The debit to the Sales Tax Collected account reduces the amount in that account because sales tax is no longer due on the purchase.

  • The credit to the Cash in Checking account reduces the amount of cash in that account.

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