The sales return journal entry is used to log the goods returned by a customer to a business. It maintains accurate books and accounts for returns. This helps correct the revenue—lowering the sales. This entry is used by businesses when they need to record goods that were sold to customers but returned due to damage, mismatch, refusal, etc. Sales return journal entry means the recording of return of previously sold goods. When a customer returns goods, the business has to reverse or decrease the sale which was recorded previously. On the books, this is reflected as an income adjustment. Students can relate the journal entry for credit sales return or sales or return basis journal entry to business records adjustment.
You will consider sales return journal entry in tally accounting up to step examples. Unless you get the journal entry for purchase return and sales return as a journal entry there. Now let us start moving on to the meaning.
What is Sales Return Journal Entry?
To be clear: Income is revenue recognised when a business sells goods. However, when a customer sends these goods back, the business must undo some of that income. The sales return journal entry is recorded to reverse recording.
What are the Reasons for Customers to Return Goods?
Customers return goods for various reasons. They may see broken products in front of them or wrong products or may not be satisfied. If the products aren’t up to standards, customers return them. This is normal in both wholesales and retail alike.
Every sale increases income in accounts. Therefore we have to write a journal entry to reduce the income as the goods comes back. This is known as the sales return journal entry.
Journal Format
The way you record a sales return is as follows:
| Account | Debit | Credit |
| Sales Return A/cTo Customer A/c | ₹Amount | ₹Amount |
This entry means:
- The Sales Return Account which is where you record this increase is debited. This account lowers sales overall.
- You now credit the Customer Account, as the business will owe less, or will return less money.
By this, the record modifies income and client balance.
Credit Sales and Returns
The majority of companies sell products on credit. That means the customer pays at a later time. We use journal entry for credit sales return when these goods are returned.
This ensures:
- Customer’s account is updated
- Sales amount is corrected
- Inventory is balanced (If you are using tally or inventory system)
Examples of Sales Return Journal Entry
After you understand the principles, let us go with the use-case. This will guide you on how to enter those entries.
Example 1: Journal entry for sales return
Mr. A buys goods worth ₹5,000 from a shop on credit. Mr. A returns goods of ₹1,000.
Journal entry for sales:
Mr. A A/c Dr. ₹5,000
Sales A/c Cr. ₹5,000
If Rs. 2,000 cost of goods sold was sold on credit then returns will be recorded as:
Sales Return A/c Dr. ₹1,000
To Mr. A A/c ₹1,000
This entry decreases sales as well as Mr. A’s balance.
Example no. 2: Sales return journal entry
You make cash sales of goods amounting to ₹8,000. So the buyer returns goods worth ₹2,000.
Journal entry for cash sales:
Cash A/c Dr. ₹8,000
To Sales A/c ₹8,000
Sales return journal entry:
Sales Return A/c Dr ₹2,000
By Cash A/c ₹2,000
This entry records the cash and voids the sale.
Journal Entry for Sale or Return Basis: A Special Case
You record the sale only when the customer accepts it only when you send it to customers on approval.
When goods are sent:
Goods on Approval A/c Dr. ₹X
To Stock A/c Cr. ₹X
The combination of Profit element shows the net gain or loss at this stage of the development cycle.
If customer returns goods:
Stock A/c Dr. ₹X
To Goods on Approval A/c ₹X
This journal entry is applied for sales or return basis.
Sales Return Journal Entry in Tally
Tally is the most popular accounting software in India. Huge as well as small firms use it every day. Students need to learn how to record sales return journal entry in tally.
We use a unique type of voucher called Credit Note in Tally to record sales returns. It can be used to reverse the initial sale and sync stock.
How to Enter Sales Return in Tally?
- Go to Gateway of Tally
- Select Accounting Vouchers
- Choose F8: Credit Note
- Fill in customer name
- Select the item and quantity returned
- If any, provide GST or tax details
- Save the entry
How Does it Work?
- Tally automatically debits the Sales Return A/c
- It posts to Customer A/c or Cash A/c.
- It also updates stock and tax records
- This is the electronic mode of sales return journal entry in tally.
After this, if you merge purchase return and sales return journal entry, you will have complete knowledge of returns.
Purchase Return vs Sales Return Journal Entry
Warrant and windfall returns clean up the records. But one is on the buyer’s side, one on the seller’s.
| Basis | Purchase Return | Sales Return |
| Who recorded it? | Buyer | Seller |
| What is returned? | Goods bought | Goods sold |
| Enter type | Debit note | Credit Note |
| Effect | Purchase A/c, Supplier A/c | Sales A/c, Customer A/c |
The accounting entry for the return of the purchased goods is:
Supplier A/c Dr. ₹X
To Purchase Return A/c ₹X
For sales return: Journal entry
Sales Return A/c Dr. ₹X
To Customer A/c ₹X
So, in a nutshell, purchase return and sales return journal entries vary based on the side of the transaction you are on.
Relevance to ACCA Syllabus
The important thing in ACCA, and specifically in the FA (Financial Accounting) and FR (Financial Reporting) papers, is that students need to understand how to record and present returns in the financial statement. At its core, the sales return journal entry is part of double-entry bookkeeping and is recognized and adjusted in the income statement.
Sales Return Journal Entry ACCA Questions
Q1: In ACCA financial reporting what is ‘Sales Return A/c’?
A. Revenue
B. Asset
C. Contra-revenue
D. Expense
Answer: C. Contra-revenue
Q2: When goods sold on credit are returned to the customer, which entry is passed?
A. Cash A/c Dr., To Sales A/c
B. Sales Return A/c Dr. To Debtor A/c
C. Debtor A/c Dr., To Sales Return A/c
D. Cash A/c Dr., [Interest A/c,] To Interest on Loan A/c
Answer: B. Sales Return A/c Dr., To Debtor A/c
Q3: Sales return is shown on which part of income statement?
A. Cost of sales
B. Revenue
C. Other income
D. Finance cost
Answer: B. Revenue
Q4: When a customer returns defective goods, the amount is:
A. Added to gross profit
B. Expense will be deducted from total revenue.
C. Increase in accounts receivable
D. Posted to purchases
Answer: B. From total revenue
Q5: A credit note is issued when a customer returns goods that they purchased.
A. To adjust purchase order
B. To expand customer’s liability
C. To reduce receivables
D. To increase revenue
ANSWER: C. To lessen receivables
Relevance to US CMA Syllabus
Part 1: Financial Planning, Performance and Analytics, CMA students explore the effects of sales returns on performance evaluation, variance analysis, and internal controls over revenue recognition.’
Sales Return Journal Entry US CMA Questions
Q1: What financial item is most directly influenced by sales returns?
A. Fixed asset turnover
B. Gross profit
C. Net fixed assets
D. Operating cash flow
Answer: B. Gross profit
Q2: What crucial document records a sales return correctly?
A. Debit note
B. Sales invoice
C. Credit note
D. Purchase order
Answer: C. Credit note
Q3: What does not recording a sales return do?
A. Stated too much revenue and net income
B. Understatement of inventory and gross margin
C. Accounts receivable understated
D. Overstated depreciation expense
ANSWER A. Overstated revenue and net income
Q4: What is the importance of tracking returns in management accounting?
A. To calculate depreciation
B. For planning cash flow
C. To track the quality of their products and the satisfaction of their customers
D. To manage accounts payable
Answer: C. To monitor product quality and customer satisfaction
Q5: Where do sales returns show in performance reporting?
A. Cost at Selling and Distribution stage
B. Variance report
C. Revenue deductions
D. Non-operating income
Answer: C. normal deductions of income
Relevance to US CPA Syllabus
Candidates of US CPA need to have an understanding of how sales return journal entry impacts GAAP compliance and auditor’s assertions and trial balance accuracy under FAR (Financial Accounting & Reporting) and AUD (Auditing).
Sales Return Journal Entry US CPA Questions
Q1: So what kind of account is “Sales Returns and Allowances” as per US GAAP?
A. Revenue
B. Asset
C. Liability
D. Contra-revenue
Answer: D. Contra-revenue
Q2: What type of audit risk exists as a result of incorrectly recorded sales return?
A. Going concern
B. Revenue overstatement
C. Understated cash flow
D. Understated liabilities
Answer: B (Revenue overstatement)
Q3: A company made sales of ₹5,000, followed by a return of ₹1,000. What is net revenue?
A. ₹5,000
B. ₹4,000
C. ₹6,000
D. ₹1,000
Answer: B. ₹4,000
Q4: Books could skim sales returns, Which ratio would be altered the most?
A. Quick ratio
B. Debt to equity
C. Gross profit margin
D. Inventory turnover
Answer-C: Gross profit margin
Q5: What is the correct journal entry for sales return on credit?
Dr. A. Cash A/c, Cr. Sales Return A/c
B. Dr. Inventory A/c, To Customer A/c
C. Sales Return A/c Debit, Account Receivable A/c Credit
D. Sales A/c Dr., To Inventory A/c
Answer: C. Sales Return A/c Dr., To Accounts Receivable A/c
Relevance to CFA Syllabus
At CFA Level I, in Financial Reporting and Analysis (FRA), students study how sales return journal entries impact the quality of earnings, measurement of income, and analysis of financial ratios.
Sales Return Journal Entry CFA Questions
Q1: Sales returns are normally recorded in the income statement as:
A. Operating expenses
B. Inventory write-offs
C. Deduction from revenue
D. Deferred revenue
ANSWER: C. A deduction from revenue
Q2: Frequent sales returns post revenue recognition can mean:
A. Improved credit terms
B. Strong inventory turnover
C. Revenue manipulation risk
D. Higher gross margin
Ans: C. Risk of revenue manipulation
Q3: Which financial metric is overstated if sales return is not recorded?
A. Operating profit
B. Cost of goods sold
C. Net cash flows
D. Tax expense
Answer: A. Operating profit
Q4: A higher sales return rate most likely lowers:
A. Receivables turnover
B. Gross profit margin
C. Depreciation
D. Liabilities
Answer: B. Gross profit margin
Q5: The following best helps an analyst to detect sales returns manipulation?
A. Analyzing depreciation schedules
B. Sales vs returns quarterly trends
C. Reviewing tax liabilities
D. Monitor non operating items
Answer: B. Comparing trends of quarterly sales vs returns
