Sales return definition
/What is a Sales Return?
A sales return is merchandise sent back by a buyer to the seller. There are several possible reasons for a sales return, including the following:
Defective or damaged products. Customers may return items if they arrive broken, malfunctioning, or with visible defects. For example, a customer receiving an electronic device that does not power on or has a cracked screen would likely send it back for a replacement or refund. Ensuring quality control can help minimize these types of returns.
Incorrect item shipped. Sales returns often occur when the seller ships the wrong product, size, color, or model. For instance, if a customer orders a blue jacket but receives a black one, they are likely to return it. Accurate order processing and inventory management are essential to reduce such errors.
Buyer's remorse. Sometimes customers return items simply because they changed their minds or found a better alternative after making a purchase. This reason is common in online shopping, where customers cannot physically examine products before buying. Offering clear product descriptions and images can help manage expectations.
Fit or function issues. In industries like apparel and electronics, products might be returned if they do not fit properly or do not function as expected. For example, a pair of shoes that is too small or a kitchen appliance that doesn’t meet performance claims may prompt a return. Providing detailed size guides and product specifications can help reduce these returns.
Shipping delays or errors. Customers might return products if they arrive significantly late or if multiple items ordered together arrive separately due to shipping mistakes. Reliable logistics and clear communication about delivery timelines are crucial to minimizing returns for this reason.
Accounting for a Sales Return
The seller records a sales 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. A sample journal entry for a $100 sales return appears next.
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. You can avoid this issue by recording a reserve for sales returns in the period in which the sale occurred.
How to Control Sales Returns
You can more closely control the amount of sales returns by requiring a sales return authorization number before your 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. This is a particular concern when you are selling to retailers, since they may attempt to return pallet-loads of goods that they are not able to sell.