The sales return invoice acts as a receipt for a product that was sold and returned as an exchange for cash or store credit.
A sales return is when a customer brings back a purchased product to the seller in exchange for their money. Keeping returns low is important for companies. Companies that experience high return rates are at risk if the return results in a chargeback. A company will set up an allowance account when they receive a sales return in order to allocate funds to fix the issue that is resulting in the sales return.
A look at how a company will account for sales returns and allowances (example):
A book shop sells $10,000 worth of books in one month.
- $10,000 Receivable
- $10,000 Sales Revenue
A large buyer returns $1,000 worth of books due to typos and printing issues.
- $1,000 Sales Returns and Allowances
- $1,000 Accounts Receivable
The book shop now puts aside $500 in sales allowances for future returns and fixes.
- Debit $500 for Sales Returns and Allowances
- This is when the book store would set up an allowance account for $500 because they are expecting more sales returns in the future to come.
At the end of the month, a profit and loss would look similar to this:
Gross Sales: $10,000
Sales Returns and Allowances: $1,500
Net Sales: $8500
A journal entry is any type of system that allows a seller to detail when a customer returns a product. For smaller businesses, a journal entry can be written into a notebook. For larger businesses or any business for that matter, especially those with multiple locations, using a computer program such as Microsoft Excel is recommended. A sale return noted in the journal entry will go on the income statement and will be deducted from gross sales in order to arrive at the net sales.
A sales return is governed by a company’s return policy. Whether it’s Walmart, BestBuy, or Amazon, every company has a policy for returns if they sell physical or digital goods. Appealing return policies create brand loyalty, but policies should be firm enough to mitigate potential harm or losses. When a sales return is activated, a receipt or invoice should be issued to show that the customer has received an exchange or their initial money for the item.