If A Company Failed To Record Goods Returned By Customers

If a company fails or forget to record goods returned by customers due to some reasons such as defective or damaged goods, which is also called Sales Returns, then the amount of Sales in Income Statement or Profit And Loss Account overstated which also causes Net Income or Net Profit to increase.

If complete entry is not recorded then the value of Accounts Receivable / Sundry Debtor, which is a Current Asset, on balance sheet also overstates which increases the total assets.

 

The entry to record for the goods returned by customer is shown below:

 

                                        Sales Returns a/c  XXX

 

                                                                  Accounts Receivable a/c  XXX

 

                                                      (Goods Returned by Customers)

 

Sales Returns is a Contra Revenue Account which is deducted from total sales which if not recorded increases the total sales in income statement. Accounts Receivable is credited as it is decreasing but as it is not recorded, so it will surely overstates the value of assets on balance sheet.