Sales Return Journal Entry with VAT

Sales return is the transaction in which customers demand to return the goods and refund due to various reasons.

The purchase of goods is an essential economic activity in any business. In the modern world, the sale of goods has become easier due to the presence of various channels such as online stores and physical stores. However, there are still instances when customers need to return the goods they have purchased.

A sale return of goods refers to a situation where a customer has completed the purchase of goods and, for whatever reason, decides to return the goods back to the seller and ask for a refund.

The reasons for customers returning goods are various, ranging from simply not liking the product to it being faulty or different from described. Regardless of the reason, all businesses should have a clear policy in place for dealing with sale return of goods. This policy should outline how customers can return goods, what documentation is required, and how refunds will be processed. Having a clear and concise policy in place will help to ensure that both businesses and customers are happy with the outcome of any sale or return of goods.

A good return policy should be designed to benefit both the customer and the business. For instance, it should be easy for the customer to return the product and receive a refund or exchange it for another product. At the same time, the policy should also allow the business to recover its losses incurred due to returns. An ideal return policy strikes a balance between these two objectives. It is also important for businesses to market their return policy in a way that does not deter potential customers from making a purchase. After all, a sale is only successful when both parties are satisfied with the outcome.

The sale returns will require the company to record the inventory back to balance sheet as the customer return the physical product. The cost of goods sold is also reversed back from income statement. If the customers have already made the payment, the company needs to refund back. If it is a credit purchase, the company needs to write off the accounts receivable. At the same time, the company must eliminate the VAT payable which record during the sale.

Journal Entry for Sale Return with VAT

Sale returns will impact the seller’s financial statements. It will reduce the company’s revenue and cost of goods sold from the income statement. It will add back the inventory to the company’s balance sheet. The company needs to reverse the accounts receivable or refund customers.

If the sale included VAT, the company needs to reverse the VAT payable as well. It is the amount that company marks up based on the tax law. it is recorded as payable which the company has obligation to pay to the tax authority.

There are two scenarios that can happen to the sale return. First, it is the return of goods when the customer has not yet made a payment which is the credit sale. Second, it is the return of goods that the customers already paid for.

Sale Return of Credit Sale

When the company sells goods on credit, it will record accounts receivable, so it needs to reverse accounts receivable when customers return goods.

The journal entry is debiting sale, VAT payable, and credit Accounts Receivable.

Account Debit Credit
Sale $$$
VAT Payable $$$
Accounts Receivable $$$

The company needs to recognize the inventory as well when customers return the physical goods.

The journal entry is debiting inventory and credit cost of goods sold.

Account Debit Credit
Inventory $$$
Cost of Goods Sold $$$

Sale Return of Cash Sale

When the company has collected cash from the customers, it will require to refund the cash back to customers. It has to reverse the sale from the income statement and remove the VAT payable from the balance sheet.

The journal entry is debiting sale, VAT payable and credit cash.

Account Debit Credit
Sale $$$
VAT Payable $$$
Cash $$$

The same as the credit sale, the company has to record the inventory and remove the cost of goods sold.

The journal entry is debiting inventory and credit cost of goods sold.

Account Debit Credit
Inventory $$$
Cost of Goods Sold $$$

Example

Company ABC sells a variety of goods to customer. The company allows the customers to return the goods if it complies with the return policy. During the month, a customer has returned the items which sold for $ 110,000 including VAT of $ 10,000 and the customer already make full payment. The items cost $ 80,000. Please prepare journal entry for sale return with VAT.

The customer has made full payment regarding this purchase. So the company has to refund the cash back when both parties agree on the return.

The journal entry is debiting sale $ 100,000, VAT payable $ 10,000 and credit Cash $ 100,000.

Account Debit Credit
Sale 100,000
VAT Payable 10,000
Cash 110,000

The company is also required to record inventory and remove cost of goods sold.

The journal entry is debiting inventory $ 80,000 and credit cost of goods sold $ 80,000.

Account Debit Credit
Inventory 80,000
Cost of Goods Sold 80,000