Sales Returns and Allowances
,You could set up your store with a no-return policy, but few retailers do. A store’s reputation for good customer service is dependent on satisfying customers, and sometimes customers decide to return an item because the item is damaged, doesn’t work, or isn’t what they want anymore.
BIZ TIPS
You need to set your return policy and be sure that all your customer-service people understand what that policy is. You also should post your return policy near your cash registers, so your customers are aware of that policy even before they purchase an item. As mentioned in Chapter 7, requiring a receipt for all return merchandise is an important part of a good internal control system.
A number of options exist for returns. Some stores allow cash back; others permit only a credit for use in the store on another item. Let’s look at how you would record two possible scenarios: one in which Lisa’s Candle Shop allows cash back and one in which the store allows the customer to return the item for a store credit. In this example, the customer returns half of the candles and one of the candlesticks she purchased in the transaction shown on the previous sales receipt.
The credit slip looks like the following if cash is returned.
Lisa’s Candle Shop, 1-17-2010
This cash refund is recorded in the following journal entry.
Recording the return involves debiting the Sales Returns and Allowances account, which shows as a negative account on the P&L statement to be subtracted from the Sales of Goods Sold account. To reverse the sales discount offered on the returned items, you credit the Sales Discounts account. You also reverse the appropriate amount from Sales Taxes Collected by debiting that Liability account because those taxes are no longer due, and finally you credit the Cash in Checking account to show the disbursal of funds.
AUDIT ALARMS
You should establish an approval procedure whereby a manager would have to approve the return of funds after verifying the merchandise has been returned and a receipt for the original purchase has been shown as well.
Suppose Lisa’s Candle Shop allows customers to receive only a store credit for returned goods. The credit slip for a store credit looks like the following.
Lisa’s Candle Shop, 1-17-2010
The following journal entry is a record of the store credit.
In this case, the entries are similar to a cash refund, but instead of crediting the Cash in Checking account, Lisa’s Candle Shop credits the Accounts Payable account. A store credit is a liability that should be tracked. Lisa’s accounting staff also notes a store credit on the customer’s ledger card. When the customer buys merchandise in the future and uses the store credit, the Accounts Payable account will be debited to reverse the store credit.
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