Thus, the term credit memorandum indicates that the seller has decreased the customer’s account and does not expect payment. In the seller’s books, a return or allowance is recorded as a reduction in sales revenue. Since the sales account normally has a credit balance, returns and allowances could be recorded on the debit side (the reduction side) of the sales account. The process of recording closing entries for service companies was illustrated in Chapter 3. You may recall that a closing entry is an entry made at the end of an accounting period that is used to close
out a temporary account.

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• Closing entries are entered into the general journal, and then posted to the general
  ledger.
• The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account.
• In the double-entry system of accounting, each financial transaction has at least one debit and one credit entry.

To illustrate, suppose that Lakeside Electronics issued the credit memorandum shown in the figure below to Champ’s TV Sales for the return of a defective 19-inch TV. This tutorial will cover the adjusting and closing process for a merchandising company. Overshooting in sales is caused due to overstating of sales returns and allowances.

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(a) How are the components of revenues and expenses different for a merchandising company? Sales returns are reductions in the company’s sales for returns the company is expecting or has received. To make this estimate, company accountants usually will examine historical sales and return trends. Closing Entries, Sales, Sales Returns & Allowances In Accounting The seller usually issues the customer a credit memorandum showing the amount of credit granted and the reason for the return. Goods sold on credit are often returned to the seller on the understanding that the customer’s account will be credited (reduced) by the amount of the return.

• Credit memo numbers are records that allow your company to track credits given for various issues.
• A return occurs when a buyer returns part or all of the merchandise they purchased back to the seller.
• At this point, the income summary account will equal the profit or loss for the period.
• This allowance is an estimate of the company’s accounts receivable balance that it expects will ultimately remain uncollectible.
• The account, therefore, has a debit balance that is opposite the credit balance of the sales account.

To close these debit balance accounts, a credit is required with a corresponding debit to the income summary. For companies using accrual accounting, this includes both cash payments and payments made on account. The sales account, otherwise known as the revenue account, is found at the top of the company’s income statement.

How to Record a Sales Return for Accounting

Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. Prepare a schedule that converts Dr. Accardo’s “excess of cash collected over cash disbursed” for the year 2017 to net income on an accrual basis for the year 2017. His work has appeared in various publications and he has performed financial editing at a Wall Street firm.

However, at the end of every account period the sales account is closed to equity as part of the closing process. Therefore, the aggregation of sales over the company’s history is found in the equity accounts. In the sales revenue section of an income statement, the sales returns and allowances account is subtracted from sales because these accounts have the opposite effect on net income. Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales.

Effects Merchandise Returns Have on Income Statements

The credit part of this entry involves both a controlling account (accounts receivable) in the general ledger and a customer’s account (Champ’s TV Sales) in the accounts receivable subsidiary ledger. However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances. The two accounts may sometimes be combined into a single account in the general ledger. This typically happens when the balances in these accounts are relatively small, so there is no point in tracking returns and allowances separately.

Processing of closing entries occurs after the end of the company’s accounting period. At this point, the income summary account will equal the profit or loss for the period. Third, the income summary account is closed to the owners’ equity account or retained earnings. When preparing closing entries for a merchandiser, the income statement accounts unique for merchandisers need to be considered — Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. To close Sales, it must be debited with a corresponding credit to the income summary. Sales Discounts and Sales Returns and Allowances are both contra revenue accounts so each has a normal debit balance.

Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3-year note payable.The equipment depreciates $400 per month. Purchased a one-year malpractice insurance policy on January 1 for $12,000.5. On January 31, determined https://kelleysbookkeeping.com/month-end-close-process/ that $500 of supplies were on hand.InstructionsPrepare the adjusting entries on January 31. Credit memos serve as vouchers for entries in the sales returns and allowances journal. Like debit memos, all credit memos are serially numbered, as shown below.

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• The purpose of closing entries is to merge the bills so a company can determine its retained earnings.
• On the expense side, there are purchases that need to be closed out, as well as purchase discounts, purchase
  returns and allowances, and freight-in.
• The original memo is sent to the customer and the duplicate copy is retained.
• Goods sold on credit are often returned to the seller on the understanding that the customer’s account will be credited (reduced) by the amount of the return.

As mentioned in the definition, the accounts that get closed are the temporary accounts, which comprise
revenues and expenses, as well as owner drawings. Within a merchandising company, there are some unique
revenue accounts that are going to be closed and hence have closing entries. These are the sales discounts
and sales returns and allowances, which will be closed in addition to the sales account. Closing entries are used in accounting to transfer the results of business operations, originally accounted for in temporary revenue and expense accounts, into permanent equity accounts.