 In this presentation we will enter a transaction for a sales return. We have our data up here on the left side. We're going to enter this information into the general journal and then post it to our worksheet here. Not posting it to the general ledger but posting it to a simple worksheet that will show us immediately the transactions that will go on a worksheet that is assigned well for a small number of transactions where we will have a beginning the entries that we will enter and then the ending balance to showing us the result of the transaction worksheet is formatted in terms of the assets and green liabilities in orange equity in light blue and revenue and expenses in dark blue. We have both debit and credits represented in terms of a debit and credit column in the general journal as well as credits will be represented with bracketed or negative numbers however in the trial balance we're going to represent the debits and credits in order to save time and simplify the formulas to have debits as positive numbers and credits as the negative numbers the check figure to see that we are in balance is the zero adding up debits and credits debits minus credits equaling zero. We then have the net income calculated here we got the sales 107 the cost of goods sold we are limiting the accounts to just those that we will be working with here so that we can see the results in terms of net income and account types here is our information on the left side we're talking about a sales return and we're going to have this is the sales price and this is the cost that we originally had so what we're doing here is we're saying that there was a sale that happened and the inventory was returned and therefore what are we going to do how are we going to deal with this return of the inventory now to do this we can start thinking through what type of accounts will be affected if the inventory gets returned well we know that we're going to increase inventory we got it back unless it's damaged of course and then you know we could start thinking through it in that format but since this is a more unusual transaction and it's closely related to the sales transaction probably easiest to think about the sale and then reverse it so even if we didn't have the numbers like we have here you want to basically go through or I suggest the process of going through first thinking about what did the sale look like and then reversing it so remember when we sell inventory there's two transactions that we can think of it as meaning we can have the transaction related to the sale similar to a service company similar to a company that doesn't have inventory but recording the sale for work done and then we have the second component dealing with inventory and then related expense of using that inventory to generate revenue cost of goods sold so if we think about those we're going to put that into our worksheet down here and just write that down and then we can easily look at it and see what we need to do in order to do the reversing of that in order to deal with the return that we have so first of all when we make the sale if we made it on account we didn't get cash we're going to say it went into accounts receivable accounts receivable has a debit balance we're going to make it to go up by doing the same thing in our worksheet we're not going to make it go up here for the return i'm just saying what happened when we made the original uh the original sale well we know accounts receivable went up so i'm going to put that in our worksheet it's down here we're going to say and so i'm just copying this i'm just right clicking copy we're going to put that in the worksheet right click and paste we're going to make a mock journal entry just to uh then reverse it for the seven or nine hundred and eighty so put nine eighty then we'll credit something for nine hundred and eighty we could put a negative negative nine eighty here or i'm going to use a formula instead of equals a negative of this number take that number and flip the sign so there's our nine eighty credit and then the other side of it is going to be what went to sales our revenue account so if it was a service company it'd be fees earned if it's a merchandising company typically called sales has a credit balance it only goes up in the credit direction we will then credit it so i'm going to copy that i'm going to paste that down here right click and paste it 123 going to we could indent it by going to the home tab alignment increase indent or just double clicking and hitting the spacebar three times next we're going to have the fact the inventory must have going down when we made the original sale that's merchandise inventory this must have gone down so it has a debit balance to make it go down we do the opposite thing to it a credit so i'm going to copy merchandise inventory right click and copy scroll back down we'll skip a line skip along the line to put it on the bottom we're going to put it here i'm in g 23 and sell g 23 right click and paste 123 and then we're going to put that in the credit column the amount 700 so in the credit column i'm going to put a negative 700 that'll put the brackets around it i'm going to then indent the sale go into the home tab alignment increase indenting then we know we're going to have some type of debit for 700 we can type in just 700 or use a formula of negative of that number take that number flip the sign it gives us a positive 700 then we just need to know what that account will be and it will be the expense it's going to be the cost of goods sold so we're going to say cost of goods sold as an expense it goes up in the debit direction we would have expensed it when we recorded this because we use the inventory in order to help generate revenue so we'll copy that we're going to put that down here in a g 22 right click and paste 123 so there's our journal entry that we would have so these are our two journal entries and in essence if they return to the merchandise we need to reverse this so we can do this step by step now note it's a little confusing when we reverse it because if we want to be in alignment with having the debits on top and the credits on bottom we're going to reverse the order in other words i could go up here and put a counts receivable and then have it in the credit side to mirror what we have here but we would rather put a counts receivable on the bottom so if i was going to copy this first one for example i'm going to say counts receivable copy that we're going to reverse it by putting it on the bottom right click and paste 123 we then indent it home tab alignment increase indenting and it's going to be for the sales price i'm going to put a negative of 980 now that of course makes sense because if they returned the merchandise if they had paid for it they would expect money back but they didn't pay for it they we still had it on a credit that's going to be typically the situation in most type of book problems so we're not going to give cash back what we're going to do instead it's say i will reduce the amount that we owe you will credit your account see we're going to credit the account there and that'll reduce the amount we're going to debit something of course and then that debit if we look here would be a reversal of sales meaning sales would be debited to make it to go down now this is the minor exception we have with this this is the thing we have to remember when we go through this process and basically i recommend remembering it like this sales doesn't go down it only goes up in the credit direction almost never goes down until we close it out at the end of the time period what we do instead is we add a contra account and the contra account is not it acts like an expense meaning it goes up in the debit direction and it brings down a net income however it's not really an expense it's a contra sales account it's an account that is going to be recorded in the revenue section of the income statement and to record net sales not net income net sales so instead of bringing this down we're going to put the debit here so we're going to increase this account a contra sales account which is in essence bringing down sales or net sales in any case so we're going to copy this right click and copy this and paste it up top right click and paste 123 so that's the one exception we'll have there then we can just reverse the second piece inventory is going to be reversed i would think of it first because it often makes most sense when we think of returning of inventory we got more inventory back if it was returned therefore the inventory should go up it has a debit balance we're going to make it go up by doing the same thing to it another debit so we'll copy the merchandise inventory i'm going to put it up top in c8 right click and paste 123 and the amount will be for 700 the cost so it's the cost then we're going to have a credit of 700 i'm going to do that with a negative of this number and enter and then we just need to know what that account will be and of course it is cost of goods sold this is really the most confusing component and that's why i really recommend doing this first writing down the sales transaction and then reversing it it's confusing for a few different reasons one is the cost of goods sold i'm going to copy this and put it on the bottom right click paste 123 in c9 then go to the home tab alignment increase in denting now cost of goods sold oftentimes is is just a confusing account for a lot of students it's an expense but it doesn't deal with spending cash which often a lot of expenses deal with and therefore it doesn't seem possibly like a normal expense maybe but it is an expense because we're consuming something merchandise in order to help us generate revenue it's also unusual because we're decreasing the expense we're crediting an expense which almost never happens so the rules basically expenses as well as sales only go up sales go up with a credit expenses go up with a debit this is the exception and exception to this rule and that's why it should be a bit confusing we we make a workaround in the sales side note by making this contra account but we don't make a contra cost of goods sold account we just reduce the cost of goods sold account so keep that in mind if we post this out then we're going to go straight down we're going to say sales returns and allowances that's going to be right here we are in i11 i'm going to say equals point to the sales returns and allowances it'll go from zero up in the debit direction to 980 and that of course goes up here it's a contra revenue account and that puts us out of balance brings net income down net income started here we brought it down to here then we're going to post the other side of accounts receivable so that's going to be here in i6 we're going to say that equals and point to that 980 this is a debit that's a credit it's going to bring this 10,200 down by 982 9,220 then we're going to post the second half here's the merchandise inventory here's the merchandise inventory here it's going up we're going to be in i7 i7 we'll say equals point to that 700 this 21,000 uh 27,000 debit will go up in the debit direction 702 27,700 putting us out of balance no effect on that income yet until we go to the cost of goods sold cost of goods sold here cost of goods sold here we're going to be in i13 within i13 we will say equals pointing to that 700 credit this is a debit of 5,000 it's going to go by down by 700 in the credit to 4,300 that puts us back in balance and that affects the net income so the net effect on net income is is this is going to be decreasing net income the contra account it's kind of acting like an expense but it's really a contra sales account it's going up and then the cost of goods sold an expense account is going down again spend some time with this transaction because these should look funny and it's something that's unusual the returns not a transaction we see all the time and therefore it's it's one that you want to spend some time with and I think the best way to do that is to record this transaction a few times and then reverse it and note that this transaction even after a few times of recording it is still confusing in and of itself because there's two components to it because there's a sale component and there's a merchandise or cost a good sold component