Accounting for Sales Return: Journal Entries and Example

When dealing with allowances, it is important to note if the value of the inventory is changing on each side of the transaction and record that change correctly depending on the inventory method being used. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

Store Credits

The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.

Financial Management: Overview and Role and Responsibilities

The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

Gross Sales Revenue or Net Sales Revenue in a Closing Entry

On 2nd Feb 2020, the firm recorded credit sales of 10 pieces for product Y and 15 pieces for product Z to one of its old customers for $50 and $25 each respectively. So when the company’s warehouse physically receives the goods, the inventory account will be debited to increase the asset, and the cost of goods sold will be credited. We know the amount of the sale has changed along with the amount owed on the receivable. Does the seller have more or less value in the Inventory account because of the allowance? Whistling Flutes has the same amount of value in inventory that it had before the transaction. The difference between an asset’s account balance and the contra account balance is known as the book value.

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. ​​​​​​As we can see from the journal entries above, the seller should debit the exact amount of return to the revenue account or the sales return allowance account once contra expense account the sale is returned. This sales return allowance account is the contra account to the sales revenue account. Under periodic inventory, we do not use the Inventory account to record day-to-day transactions. Instead, we use Purchases and the contra accounts related to Purchases.

• A contra account is an account with a balance opposite the normal accounts in its category.
• The company would see the original amount, discounted sale, and net sales in the contra revenue account.
• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days.
• It is deducted from “Sales” (or “Gross Sales”) in the income statement.

For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. A seller will then have to record a sales return by debiting a Sales Return and Allowances account and crediting the Accounts Receivable account in a case where the sale is made on credit. The credit to the accounts receivable account will reduce the outstanding amount of accounts receivable. Conversely, if the sale was made against cash, the journal entry will require the same account to be debited but the credit will be against cash or payable to the customer account. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting.

• It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance.
• If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement.
• To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
• Sales Returns and Allowances is a contra-revenue account deducted from Sales.
• Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.

The goods will deliver to the customer, and the inventories will reduce. Notice the entries for returns and allowances are the same for the buyer. In both cases the dollar value of the inventory has changed, so the entry is the same. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.

Time Value of Money

A return occurs when a buyer returns part or all of the merchandise they purchased back to the seller. An allowance occurs when a buyer decides to keep damaged or defective goods but at a reduction from the original price. If the return or allowance involves a refund of the customer’s payment, “Cash” is credited. Or, a payable account is credited if the refund is to be made at a future date. When only “Net Sales” is presented in the income statement, its computation is shown in notes to financial statements. Essentially, we are reversing a portion of the original purchase journal entry.

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You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.