Say that you\u2019ve given your clients the right to return their goods subject to conditions. When those conditions are met, some of them use the right. It\u2019s one thing what you do with the goods, another how you account for the returning of the goods in your financial statements.\u00a0<\/p>\n
Let\u2019s say that we know the usual return rate is 5%. Having made a sale for 1,000, we account for the sale as follows:<\/p>\n
Db \u00a0\u00a0\u00a0\u00a0\u00a0 Account receivable 1,000<\/p>\n
Cr \u00a0\u00a0\u00a0\u00a0\u00a0 Sales revenue 950<\/p>\n
Cr\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Provision 50<\/p>\n
Once the return is made, you account for it as follows:<\/p>\n
Db \u00a0\u00a0\u00a0\u00a0\u00a0 Provision 50<\/p>\n
Cr \u00a0\u00a0\u00a0\u00a0\u00a0 Cash and cash equivalents 50 \/ Account receivable 50<\/p>\n
Yes, that\u2019s a very generic example and hugely dependant on what the actual balances and conditions are, i.e. if the client has paid up yet or hasn\u2019t.<\/p>\n
However, what this example shows is the idea how the returns should be reflected in your accounts and how the provision is accounted.<\/p>\n
More so, if the revenue were recognized in full in the situation where we cannot estimate the level of returns, the initial entry would be as follows (given we\u2019ve estimated that 10% of goods will be returned):<\/p>\n
Db\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Account receivable 1,000<\/p>\n
Db \u00a0\u00a0\u00a0\u00a0\u00a0 Provision expense 100<\/p>\n
Cr\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Sales revenue 1,000<\/p>\n
Cr \u00a0\u00a0\u00a0\u00a0\u00a0 Provision 100<\/p>\n
Once the returns happen, your entry is as follows:<\/p>\n
Db\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Provision 100<\/p>\n
Cr \u00a0\u00a0\u00a0\u00a0\u00a0 Cash and cash equivalents 100 \/ Account receivable 100<\/p>\n
Note that the last line, where you either credit cash or receivables depends on whether the client initially paid their balances or not. Again, it\u2019s a simplified example, that should give you an idea how to account for sales returns.<\/p>\n","protected":false},"excerpt":{"rendered":"
Say that you\u2019ve given your clients the right to return their goods subject to conditions. When those conditions are met, some of them use the right. It\u2019s one thing what you do with the goods, another how you account for the returning of the goods in your financial statements.\u00a0<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,39],"tags":[],"class_list":["post-4689","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-11-revenue"],"aioseo_notices":[],"_links":{"self":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4689","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=4689"}],"version-history":[{"count":1,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4689\/revisions"}],"predecessor-version":[{"id":4690,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4689\/revisions\/4690"}],"wp:attachment":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=4689"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=4689"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=4689"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}