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.