When a customer returns a product for a refund, which of the following journal entries is most appropriate?

• A. Debit Accounts Receivable; Credit Sales Revenue
• B. Debit Cash; Credit Sales Returns and Allowances
• C. Debit Sales Returns and Allowances; Credit Accounts Receivable
• D. Debit Sales Revenue; Credit Inventory

Answer: (C)

Verified step by step guidance

1. Understand the context: When a customer returns a product, it impacts both the revenue and the accounts receivable or cash, depending on how the original sale was recorded. The return also needs to be tracked separately for reporting purposes.
2. Identify the correct accounts: Sales Returns and Allowances is used to record the value of returned goods, reducing the total sales revenue. Accounts Receivable is credited to reverse the amount owed by the customer for the returned product.
3. Determine the journal entry: The correct journal entry for a product return is to debit Sales Returns and Allowances (to increase this contra-revenue account) and credit Accounts Receivable (to decrease the amount owed by the customer).
4. Understand why other options are incorrect: For example, debiting Cash and crediting Sales Returns and Allowances would only apply if the customer was refunded in cash, which is not specified here. Similarly, debiting Sales Revenue directly is incorrect because returns are tracked separately in the Sales Returns and Allowances account.
5. Apply the principle: Always ensure that returns are recorded in a way that accurately reflects the reduction in revenue and the reversal of the receivable or cash transaction, maintaining proper financial reporting.