Natalia Alva

How is return inwards treated in trial balance?

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  1. This answer was edited.

    Return Inwards

    In the layman language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues which were earlier sold on credit. Return inwards is also known as sales returns.

    The amount of return inwards (or) sales returns is deducted from the total sales of the firm. It is treated as a contra-revenue transaction. Return inwards holds the debit balance and is placed on the debit side of the trial balance.

    To make this concept easy and crispy, I would further like to add an example and trial balance (tabular format) for your better understanding.

    Example- On 1st May, Max Ltd. (a dealer in the refrigerator) sold 20 refrigerators for 5,00,000 on credit to Alexa Ltd. On 25th May they returned all the refrigerators to Max Ltd. due to the serious defects in a model of the refrigerators. Pass journal entries for the above transaction in the books of Max Ltd.
    In the books of Max Ltd (Modern Approach)

    a) Entry for the sale of goods

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st May Alexa Ltd  a/c Dr 500,000 Asset Debit- The Increase in Asset
     To Sales returns a/c  500,000 Income Credit- The Increase in Income

    (Being goods sold on credit to Alexa Ltd)

    b) Entry for the return of goods sold to Alexa Ltd.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    25th May Sales return a/c   Dr 500,000 Income Debit- The Decrease in Income
     To Alexa Ltd a/c  500,000 Asset Credit- The Decrease in Asset

    (Being goods returned by Alexa Ltd due to serious defects)

    Placement in Trial Balance

    Return Inwards

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