Journal entry for goods returned by customers

Introduction

Sometimes, the customers may return the goods that we have sold to them for various reasons. In this case, we need to make the journal entry for goods returned by customers in order to account for the return transaction as well as to reverse the cost of goods sold if we use the perpetual inventory system.

Of course, if we the periodic inventory system, we don’t need to make the reverse entry of the cost of goods sold. We just need to record the sales returns to the income statement alone. This is due to, under the periodic inventory system, we wouldn’t have recorded the cost of goods sold at the time of the sale of the goods in the first place.

In any case, goods returned by customers will reduce our net sales revenue on the income statement as well as reduce our total assets on the balance sheet. Hence, this transaction will impact both our balance sheet and our income statement in a negative way. Though, in business, it may be important to have a return policy so that the customers have more confidence in buying our products.

Journal entry for goods returned by customers

We can make the journal entry for goods returned by customers by debiting the sales returns and allowances account and crediting the accounts receivable or cash account. At the same time, we also need to make the journal entry to account for the inventory as well as the cost of goods sold that we have recorded at the time of sales.

Goods returned by customers – perpetual inventory

Sales returns and allowances account is a contra account to sales revenue on the income statement in which its normal balance is on the debit side.

Under the perpetual inventory system, we need to update the balance of the inventory every time there is an inventory in or inventory out. That is why, under the perpetual inventory system, we need to make another journal entry of debiting the inventory account and crediting the cost of goods sold account as in the above journal entry.

On the other hand, if we use the periodic inventory system, we do not need to make the journal entry of the inventory and cost of goods sold above. This is due to, under periodic inventory system, we usually only record the inventory and cost of goods sold when we perform the physical count of the inventory which usually happens at the end of the accounting period.

Likewise, under the periodic inventory system, we only need to make one journal entry for goods returned by the customer as below:

Goods returned by customers – periodic inventory

Goods returned by customers example

For example, we have the goods return policy where the customers can return the bought goods within 30 days if they are not satisfied with the goods. Likewise, on January 10, one of our customers returns the goods that we have sold them for $1,000 back to us.

This $1,000 of the goods returned are purchased by our customer on credit on December 20, the previous month and it has the original cost of $600 which was previously recorded in our inventory.

We use the perpetual inventory system in order to manage our inventory.

In this case, we can make the journal entry for the $1,000 goods returned by the customer by debiting the $1,000 amount into the sales returns and allowances account and crediting the same amount into the accounts receivable as below:

In this journal entry, both total assets on the balance sheet and net sales revenue on the incomes statement decrease by $1,000.

At the same time, we also need to record the inventory in and the reverse of the $600 of the cost of goods sold as below:

This journal entry will increase our total assets by $600 and nets sales revenue by the same amount.

So, the net impact of the goods returned by the customer on January 10, is the decrease of total assets and nets sales revenue by $400 ($1,000 – $600).

Damaged goods returned by customers

It may be important to note that the goods returned by the customers may be due to the goods being damaged. In this case, when we record the inventory goods returned with the debit of inventory together with the credit of costs of goods sold, we need to take into account the value of the goods after damage.

In other words, the value of the goods returned by customers due to the damage will be less than their original value when we made the sales. So, our journal entry to record the inventory in as well as the reserve of the cost of goods sold will be less than the cost of inventory at the time of the sales.

For example, assuming that the customer returns the goods in the example above is due to the damage. And the returned goods are valued at only $200 due to the damage which is less than its original cost of $600.

In this case, the journal entry for the $1,000 goods returned by the customer above will be as below instead: