What are Sales Returns

When goods sold to our customer (Accounts Receivable) but the customer finds that some goods are damaged or lower quality or not according to the order specified then he writes a Debit Note to seller requesting him to replace the goods. If the seller accepts the offer, then he sends a Credit Note to buyer intimating him that he has accepted his request and will replace the goods. The following Entry is passed by the Accountant appointed at Accounting Department after receiving a copy of Credit Note from seller:

                                                  Sales Returns a/c      XXX

                                                                          Accounts Receivable a/c      XXX

(Goods Returned Due To Lower Quality)

Sales Returns are also known as Returns Inward or Returns From Customers. Sales Returns is a Contra Revenue Account which is deducted from Gross Sales in Income Statement / Profit And Loss Account.

Is Sales Return An Asset Or Expense?

Sales Return is neither an Asset nor an Expense but, actually, it is a contra revenue account as it is deducted from total sales in order to find out net sales for the accounting period.

Sales return has a normal debit balance which is opposite to sales account i.e., Sales has normal credit balance. Sales returns actually decrease the sales as the customers returned the goods sold due to defective or damaged goods or goods are not delivered according to the contract of sale.