What is the purpose of the Sales Returns account?

• A. To record the value of goods returned by customers, reducing total sales revenue.
• B. To record discounts given to customers.
• C. To record cash received from customers.
• D. To record bad debts.

Answer: (A)

Sales returns is a contra-revenue account used to record goods returned by customers, so it lowers the amount of revenue reported from sales. Keeping a separate Sales Returns (and Allowances) figure allows you to see how much revenue was reversed due to returns and to arrive at net sales on the income statement.

In practice, when a customer returns goods, you would debit Sales Returns and Allowances and credit the appropriate account (Accounts Receivable if the sale was on credit, or Cash if it was a cash sale). If the returned goods can be resold, you would also adjust inventory and cost of goods sold accordingly. This account does not track discounts, cash receipts, or bad debts, which are recorded in Sales Discounts, Cash/Accounts Receivable, and Bad Debts respectively.