In a business environment, it is normal to have merchandise sent back by a customer to the
seller for some reasons. Therefore, when merchandise is returned for a refund (cash sale)
or for credit to be applied to other purchases (credit sale), that situation is called a Sales
return. The seller will record this amount return to the Sales returns account instead of
deduct directly from Sales revenue account. Therefore, Sales returns are considered a
contra-revenue account to Sale. Recording sales returns in a separate contra-revenue
account allows management to monitor returns and allowances as a percentage of overall
sales.
Companies use a contra account, instead of debiting Sales, to disclose in the account and in
the income statement the amount of Sales returns. Disclosure of this information is really
important to management because of excessive returns and allowances may incur some
problems – inferior merchandise, inefficiencies in filling orders, errors in billing
customers, or delivery or shipment mistakes. Moreover, if we record directly to Sale
(revenue) account the amount of sales returns, it would obscure the relative importance of
Sales returns as a percentage of sales. It also could distort comparisons between total sales
in different accounting periods. From all of the above, the Sales returns account is
considered faithful representation. According to the conceptual framework, it is complete,
neutral, and the process used to produce the reported information has been selected and
applied with no errors in the process.
Let discuss two methods that related to the accounting for Sales returns, which are the
