Accounting plays a crucial role in maintaining the financial health of a business. Among the many transactions that businesses record, sales returns and purchase returns are essential to track adjustments in revenue and expenses accurately. These transactions affect financial statements, inventory levels, and overall profitability.
In this article, we will explore sales return and purchase return journal entries, their impact on financial records, and how businesses should record them in their books.
What is a Sales Return?
A sales return occurs when a customer returns goods to the seller due to defects, incorrect shipments, or dissatisfaction with the product. It results in a reduction in sales revenue and accounts receivable (if sold on credit) or a refund (if paid in cash).
Journal Entries for Sales Return
1. When Goods Are Returned by the Customer (Credit Sale)
If goods were originally sold on credit and the customer returns them, the journal entry would be:
Journal Entry:
Sales Return Account (or Sales Return & Allowance) Dr. ₹XX
Accounts Receivable (Customer’s Account) Cr. ₹XX
- Sales Return Journal Entry Account: This is a contra-revenue account that offsets sales revenue.
- Accounts Receivable:The amount due from the customer is reduced.
2. When Goods Are Returned by the Customer (Cash Sale)
If goods were sold for cash and later returned, the journal entry would be:
Journal Entry:
Sales Return Account Dr. ₹XX
Cash Account Cr. ₹XX
- Cash Account:The business refunds the amount to the customer.If the Seller Charges a Restocking Fee
Sometimes, a business charges a restocking fee for returned goods. If the business keeps ₹500 as a restocking fee from a ₹5,000 return, the journal entry would be:
Journal Entry:
Sales Return Account Dr. ₹5,000
Accounts Receivable Cr. ₹4,500
Restocking Fee Income Cr. ₹500
4. Impact on Inventory (If Goods Are Resalable)
If the returned goods are in good condition and added back to inventory:
Journal Entry:
Inventory Account Dr. ₹XX
Cost of Goods Sold (COGS) Cr. ₹XX
This reverses the expense recorded when the item was initially sold.
What is a Purchase Return?
A purchase return occurs when a business returns goods to a supplier due to defects, incorrect shipments, or other issues. This reduces inventory and the liability to pay the supplier.
Journal Entries for Purchase Return
1. When Goods Are Returned to the Supplier (Credit Purchase)
If goods were originally purchased on credit and are returned to the supplier, the journal entry would be:
Journal Entry:
Accounts Payable (Supplier’s Account) Dr. ₹XX
Purchase Return Account Cr. ₹XX
- Accounts Payable:The liability to the supplier is reduced.
- Purchase Return Account: This is a contra-expense account that offsets purchase expenses.
2. When Goods Are Returned to the Supplier (Cash Purchase)
If goods were purchased for cash and are later returned, the journal entry would be:
Journal Entry:
Cash Account Dr. ₹XX
Purchase Return Account Cr. ₹XX
- Cash Account:The supplier refunds the money to the business.
3. If the Supplier Charges a Restocking Fee
If the supplier deducts a restocking fee of ₹200 from a ₹3,000 return, the journal entry would be:
Journal Entry:
Accounts Payable Dr. ₹3,000
Purchase Return Cr. ₹2,800
Restocking Fee Expense Cr. ₹200
4. Impact on Inventory (If Goods Are Removed from Stock)
If the returned goods were already recorded in inventory, the business must adjust its stock records:
Journal Entry:
Cost of Goods Sold (COGS) Dr. ₹XX
Inventory Account Cr. ₹XX
This reverses the inventory addition recorded during the initial purchase.
Sales Return vs. Purchase Return: Key Differences
| Aspect | Sales Return | Purchase Return |
| Definition | Goods returned by customers | Goods returned to suppliers |
| Impact | Decreases revenue and accounts receivable | Decreases expenses and accounts payable |
| Contra Account | Sales Return Account | Purchase Return Account |
| Effect on Inventory | May increase stock (if resalable) | May decrease stock (if already recorded) |
| Refund Method | Refund to customer or adjustment in accounts receivable | Refund from supplier or adjustment in accounts payable |
Why Are Sales and Purchase Returns Important?
Recording sales and purchase returns accurately is crucial for businesses because:
- They affect financial statements by adjusting revenue and expenses.
- They help maintain accurate inventory levels.
- They prevent discrepancies in tax calculations(GST, VAT, etc.).
- They improve supplier and customer relationship management.
Conclusion
Sales returns and purchase returns are common business transactions that require proper accounting treatment. By maintaining accurate journal entries, businesses can ensure transparency, manage their financial health effectively, and avoid unnecessary losses.
Whether dealing with customer returns (sales return) or sending goods back to suppliers (purchase return), businesses must document these transactions systematically to maintain a clear financial record and ensure compliance with accounting standards.
By following the correct journal entry practices outlined above, businesses can streamline their accounting process and make better financial decisions.
