Returns Inward
“Returns Inward” (also known as “sales returns” or “returns and allowances”) refers to the goods returned to a business by its customers. Essentially, it’s when a customer returns products they’ve previously bought from the business. There can be various reasons for this, such as damaged goods, incorrect items shipped, or simply customer dissatisfaction.
In the realm of accounting:
- Returns Inward” is recorded on the debit side of the returns inward journal.
- It reduces the sales revenue of the business. Hence, when preparing the income statement, sales returns are subtracted from total sales to show the net sales.
- On the balance sheet, the returns will reduce the value of the accounts receivable if the original sale was made on credit.
Example of Returns Inward
TechSavvy Inc. is an electronics store that sells a variety of gadgets. On January 1st, they recorded a sale of 10 tablets at $300 each, amounting to a total of $3,000. The tablets were sold on credit, meaning the customer will pay at a later date.
However, on January 5th, the customer returned 2 of those tablets, citing that they were not functioning correctly.
Accounting Entries:
- Initial Sale (January 1st):
- Debit Accounts Receivable: $3,000 (The store expects to receive this amount from the customer.)
- Credit Sales: $3,000 (This records the revenue from the sale.)
- Returns Inward (January 5th):
- Debit Sales Returns (Returns Inward): $600 (This is 2 tablets x $300 each.)
- Credit Accounts Receivable: $600 (This reduces the amount the store expects to receive since the customer returned the items.)
Financial Statement Impact:
- Income Statement: The $600 from the returns will be subtracted from the total sales for the period, reducing the net sales. So, instead of recording $3,000 in sales revenue, TechSavvy Inc. would report a net sales revenue of $2,400 ($3,000 – $600).
- Balance Sheet: The Accounts Receivable will now stand at $2,400 instead of the initial $3,000, reflecting the amount the customer now owes after returning the tablets.
Operational Insights:
From an operational standpoint, TechSavvy Inc. might want to inspect the returned tablets to determine the defect. If such returns become frequent, it could indicate a potential issue with their supplier or their quality control process. Addressing these issues early can prevent future returns and protect the company’s reputation.
This example illustrates the financial recording of returns inward and how businesses might use this information to inform their operational decisions.
