Q5-15RQ - Horngren'S Financial And Managerial Accounting

Question

Under the new revenue recognition standard, what most companies do at the end of the period related to sales returns? Describe the journal entries that would be recorded.

Step-by-Step Solution

Answer

As per the new revenue recognition standard, the companies must compute the net amount at the end of the period related to sales returns and estimate the refunds payable balances. 

Meaning of Sales Returns

In accounting, sales returns refer to the goods returned by the buyer to the seller due to any damages, defects, or any other issue. Such returns decrease the sales revenues of the business concern.

Companies’ responsibility at the end of the period

At the end of the accounting period, companies must compute the net amount after the settlement of all the applicable discounts. 

In addition, as per the new revenue recognition standard, refunds payable are required to be estimated and recorded.

Journal entries required

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Sales revenue	XXX
	Refunds payable		XXX
	(To record the refunds payable)
	Estimated returned inventory	XXX
	Cost of goods sold		XXX
	(To record the cost of goods sold)