Sales Returns and Allowances Journal Entry: Step-by-Step
Learn how to record sales returns, allowances, and the impact on net sales and accounts receivable.
Learn how to record sales returns, allowances, and the impact on net sales and accounts receivable.
Scenario
On May 4, Northside Supply sold goods on credit for $6,000 (cost $3,600). On May 9, the customer returned goods invoiced at $1,500 (cost $900). On May 12, Northside granted a $300 allowance for minor defects on remaining goods.
Journal Entries
May 4 — Original credit sale.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $6,000 | |
| Sales Revenue | $6,000 |
May 4 — Record cost of goods sold for the original sale.
| Account | Debit | Credit |
|---|---|---|
| Cost of Goods Sold | $3,600 | |
| Inventory | $3,600 |
May 9 — Record customer return (contra-revenue) and reduce receivable.
| Account | Debit | Credit |
|---|---|---|
| Sales Returns and Allowances | $1,500 | |
| Accounts Receivable | $1,500 |
May 9 — Return inventory to stock and reverse related COGS.
| Account | Debit | Credit |
|---|---|---|
| Inventory | $900 | |
| Cost of Goods Sold | $900 |
May 12 — Record allowance granted while customer keeps goods.
| Account | Debit | Credit |
|---|---|---|
| Sales Returns and Allowances | $300 | |
| Accounts Receivable | $300 |
Explanation
Sales Returns and Allowances is a contra-revenue account used to show reductions to gross sales. Returns affect both revenue and inventory flows, while allowances reduce receivables and net sales but usually do not move inventory. This presentation improves transparency by keeping gross sales visible while reporting net sales accurately.
Variations
If the customer paid cash instead of buying on credit, credit Cash instead of Accounts Receivable for the return or allowance.
If goods are not resalable, skip the inventory reversal and handle disposal separately under inventory policy.
Common Mistakes to Avoid
- ✗Posting returns directly against Sales Revenue instead of the contra-revenue account
- ✗Forgetting to reverse COGS and Inventory for returned goods
- ✗Recording allowance entries as operating expenses instead of revenue reductions
FAQs
Common questions about this journal entry
Only when goods are physically returned and can be re-entered into inventory. A price allowance without a return usually affects revenue and receivables only.
Using Sales Returns and Allowances as a separate contra-revenue account preserves the gross sales figure, which is valuable for analysis. Management can see total sales volume ($6,000) separately from returns and allowances ($1,800), making it easier to track return rates, identify quality issues, and compare performance across periods. Debiting Sales Revenue directly hides this information.
A sales return involves the customer physically sending goods back to the seller — both revenue and inventory are affected. A sales allowance is a price reduction granted while the customer keeps the goods (e.g., for minor defects or late delivery). Allowances reduce revenue and receivables but typically don't affect inventory or COGS because the goods aren't returned.
Net Sales = Gross Sales − Sales Returns and Allowances − Sales Discounts. In this example: $6,000 − $1,500 − $300 = $4,200 net sales. COGS is also adjusted ($3,600 − $900 = $2,700), so gross profit reflects the actual economic outcome of the transactions.
Don't debit Inventory for damaged returns — the goods have no resale value. Instead, leave the COGS reversal out and write off the returned goods directly. Some companies debit a Loss on Inventory or Inventory Write-Down account to track non-resalable returns separately from normal COGS.