Sale Discounts Returns Accounting

Accounting for sale discounts returns is not too difficult if you understand the basic accounting concepts behind the journal entries involved.

Sales discounts returns are common occurrences with most small business owners.

Whether you keep your accounting on paper, in spreadsheets, or in accounting software, understanding how to properly record those sale discounts returns is imperative.

Accounting for Sale Discounts…

A sale discount are simply a decrease in the price of your small business’s goods or services.

There are basically two types of sale discounts and you will account for them differently.

The first one is a discount offered at the time of purchase. This type of sales discount is usually ignored for accounting purposes and the sale is recorded at the price the customer paid.

Take a quick peep at the accounting journal entries for Jane and Bob’s fictitious Thingamajigs store.

In the following example, Jane and Bob are offering a 10% sale on all of their $50 thingamajigs…

Cash $45.00
Sales $45.00
Thingamajig retailed for $50.00, but with 10% discount actual purchase price was $45

The second type of sales discounts are Cash Discounts. They are usually offered when your customers pays off their credit purchases with your business in a timely manner.

For example, Jane and Bob offer a 1% cash discount to all of their credit customers if they pay their outstanding balances within 10 days. Because not all of their credit customers take advantage of the cash discount and pay within the 10 days, the initial sale must be recorded at full purchase price.

In the first journal entry example below, the buyer purchased 10 thingamajigs for a total of $500.00:

Accounts Receivables                         $500.00

                             Sales                          $500.00

The buyer pays the invoice minus the 1% sale discount within 10 days:

Cash                                                       $495.00

Sales Discount                                     $5.00

Accounts Receivables                         $500.00

Accounting for Sale Returns

Sale returns are a normal part of most small businesses. The first few sale return requests I received when I started my business hurt my feelings and made me doubt myself and my products.

But I soon learned that everyone is different and what may be perfect for one may not be the best fit for another, so you take sale returns for what they are…a common and normal occurrence and don’t take it personally:)

Accounting for them is a different story.

The sale returns must be deducted from your “Sales” account, but not by taking that amount off that day’s sales!

The proper way to record sales returns is to set up a contra‐revenue account and title it “Sales Return” or something similar.

A contra revenue account is an account that reduces the amounts recorded in your revenue accounts.

They usually have debit balance instead of the usual credit balances of income accounts (see this basic accounting concepts page).

You will use this account to keep track of and record your sale returns and reduce your income accordingly.

For example, the customer that bought the thingamajig on sale (see example above) brings it back a week later and requests a refund which you process immediately.

Since it was a cash sale, your journal entry to record that return would be:

Sales Return                                       $45.00

                            Cash                         $45.00

The Sales Returns will be deducted off your Sales on your Income Statement and called Net Sales.

What if it was a credit sale and the customer has not yet paid the invoice?

For example, the credit customer in an earlier example, got home and realized 1 of the 10 thingamajigs was defected and brings it back the next day. You do not have another thingamajig in that particular color, so you tell the customer you will credit their account for the returned item

Your journal entry would look like this:

Sales Return                                        $50.00

                    Accounts Receivables    $50.00

No further journal entries are required as the accounts receivables for that particular customer has been reduced by the proper amount.

Accounting for these sale discounts returns are not only important for the mandatory tracking of your income, expenses, sale discounts returns, assets, liabilities, etc., but those accounting journals will come in extremely helpful when it comes tax time and you have to report sales and sale returns.

 

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