Say that you’ve given your clients the right to return their goods subject to conditions. When those conditions are met, some of them use the right. It’s one thing what you do with the goods, another how you account for the returning of the goods in your financial statements. 

Let’s say that we know the usual return rate is 5%. Having made a sale for 1,000, we account for the sale as follows:

Db       Account receivable 1,000

Cr       Sales revenue 950

Cr       Provision 50

Once the return is made, you account for it as follows:

Db       Provision 50

Cr       Cash and cash equivalents 50 / Account receivable 50

Yes, that’s 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’t.

However, what this example shows is the idea how the returns should be reflected in your accounts and how the provision is accounted.

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’ve estimated that 10% of goods will be returned):

Db       Account receivable 1,000

Db       Provision expense 100

Cr       Sales revenue 1,000

Cr       Provision 100

Once the returns happen, your entry is as follows:

Db       Provision 100

Cr       Cash and cash equivalents 100 / Account receivable 100

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’s a simplified example, that should give you an idea how to account for sales returns.