Debit vs Credit: Bookkeeping Basics Explained

Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner’s capital account or to a corporation’s retained earnings account. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited.

Purchases are an expense which would go on the debit side of the trial balance. Accounts Receivable decreases (credit) for the original amount owed, less the return of $3,500 and the allowance of $300 ($19,250 – $3,500 – $300). Since the customer paid on October 15, they made the 15-day window, thus receiving a discount of 10%.

Creating a sales return and allowances journal entry

When the sales taxes are due for payment, the company pays cash to the government, which eliminates its sales tax liability. Sales return is treated as a contra-revenue transaction, so, the amount of sales return is deducted from the total sales of the company. It holds a debit balance and is therefore placed on the debit side of the trial balance. In order to understand this better let’s look at an example with a trial balance (tabular format). In T-accounts, the debit and credit entries record changes in value resulting from business transactions. Hence, a debit entry in an account would basically mean a transfer of value to that account, while a credit entry would mean a transfer of value from the account.

Johnny Diary Co. will have to record the $150 as a debit to the Sales return and allowance account and record the same $150 as a credit to the Cash account. Debit the appropriate tax liability account by the taxes collected on the original sale. Credit cash or accounts receivable by the full amount of the original sales transaction. A business lists the “sales returns and allowances” account below gross revenue on the income statement and reports “net sales” below that.

The Effect of Returns on Gross Margin

The calculation of sales returns depends on the type of sale that was made. If it was a cash sale, then the total amount of the sales return will be deducted from the cash sales account. If it was a Credit Sale, then the total amount of the sales return will be deducted from the Credit Sales account. Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. Whenever cash is received, the asset account Cash is debited and another account will need to be credited.

• This way, customers who do not have an authorization code will not return items.
• Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales.
• Sales are recorded as a credit because the offsetting side of the journal entry is a debit – usually to either the cash or accounts receivable account.
• There are several advantages and disadvantages for a company offering credit sales to customers.

A customer purchases 55 units of the 4-in-1 desktop printers on October 1 on credit. Terms of the sale are 10 ÷ 15, n ÷ 40, with an invoice date of October 1. On October 6, the customer returned 10 of the printers to CBS for a full refund. Accounts Receivable decreases (credit) and Cash increases (debit) for the full amount owed. No discount was offered with this transaction; thus the full payment of $15,000 occurs.

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Therefore, according to the modern rule of accounting the sales return account has to be debited because it causes a decrease in the revenue of the business. Sales return is, therefore, recorded when a customer returns the products purchased by them and receives a refund for the purchase price. This account reduces the revenue generated from the sales and as such is a contra-revenue account that offsets the balance of revenue.

Let’s look at what debit and credit mean to have a proper understanding of this. The second way Johnny Diary Co. can handle this sales return is to record the $150 as a negative sale. This means that the company will record the $150 sales return as a negative number directly into the sales revenue account. On September 1, CBS 5 tax issues small businesses should watch sold 250 landline telephones to a customer who paid with cash. On September 3, the customer discovers that 40 of the phones are the wrong color and returns the phones to CBS in exchange for a full refund. CBS determines that the returned merchandise can be resold and returns the merchandise to inventory at its original cost.

What is the difference between purchase return and sales return?

This overstates profits in the first period and understates profits in the later period. Record the journal entries for the following sales transactions of a retailer. On July 1, CBS sells 10 electronic hardware packages to a customer at a sales price of $1,200 each. Since only one chair was returned, the total amount of the sales return was $70. A sales return also happens when you receive the wrong product, e.g., if you purchase a Mac laptop and an HP is shipped to you. Outside of a defective product, there are other reasons a consumer would conduct a sales return.