A return is a new transaction. You record only the returned goods, at their own value, and leave the original sale and any payment exactly as they were.
This lesson is part of tracing a transaction through the whole accounting cycle.
How do you record a returned item?
- Work out the value of only the goods returned.
- Identify who returned them: a customer (sales return) or the business (purchase return).
- Reverse the original entry for that value, using a separate returns account.
- Leave everything else in the account untouched.
Worked example: Hana’s account
Ravi sells 20 units to Hana on credit at RM30 each, total RM600. Hana pays RM200 by bank transfer. Later she returns 5 faulty units.
Return value = 5 × 30 = 150. The entry is debit Sales returns 150, credit Hana 150.
| Debit | RM | Credit | RM |
|---|---|---|---|
| 3 Jun Sales | 600 | 10 Jun Bank | 200 |
| 18 Jun Sales returns | 150 |
The table above is Hana’s account. The sale is on the debit side (600), and the payment (200) and return (150) are on the credit side.
Debits: 600. Credits: 200 + 150 = 350. The balance is 600 − 350 = 250, which Hana still owes.
For the trading account, sales are 600 and sales returns are 150, so net sales are 450.
What stays untouched?
- The original sale of 600 stays in Sales and in Hana’s account.
- The payment of 200 stays on the credit side and is not reduced.
- Only the returned goods change, through the returns account.
The mistake that costs marks
The slip is to cancel the whole sale, debit Sales 600 and credit Hana 600, because “the goods came back”. Hana did keep 15 units, and she still owes for them.
| Step | Wrong | Right |
|---|---|---|
| Entry | Debit Sales 600, credit Hana 600 | Debit Sales returns 150, credit Hana 150 |
| Hana balance | 600 − 600 − 200 = −200 (business owes her) | 250 (Hana owes) |
| Net sales | 0 | 450 |
The wrong version makes the business look like it owes Hana money, which is impossible here.
Check yourself
Ravi buys 30 units at RM40 (total RM1 200) on credit from Suria Trading and returns 6 faulty units. What is the entry, and what does Ravi now owe?
Answer
Return value = 6 × 40 = 240. Debit Suria Trading 240, credit Purchases returns 240.
Ravi owes 1 200 − 240 = RM960, assuming no payment yet. Purchases stays 1 200 in the ledger, and Purchases returns 240 is deducted from it in the trading account.
What to study next
Test all four skills in the integrated practice set. For how returns affect gross profit, read distinguishing gross and net profit.
If you want a teacher to go through your own debtor and creditor accounts, see online one-to-one Accounting tuition.