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Net Sales:Sales Returns

Brian Krogol
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Alright, so let's discuss revenue in a little more detail. And let's see how sales returns when the customer returns, good or sales allowances can decrease our revenue, Let's check these out. So when the company sells goods, we're going to credit the revenue account, right? Pretty straightforward. We credit our revenue account whenever we sell something. So T. O. T. O. S. Company things on shelves. Company sold 500 units of things on account at a price of $12 per thing. Okay, so how much revenue did we earn? We sold 500 things, 500 times the $12. That's gonna give us six $6000 Right? That's what we earned. But we haven't been paid that amount, right? It says on account. So we're gonna have an accounts receivable a our accounts receivable for 6000. And we're debating that right to increase our accounts receivable, and we're going to credit our revenue, right? Our revenue for 6000, because that's how much we earn here. And how would this affect our assets would go up by 6000, Right, And our revenue would increase our equity also by 6000. Okay. Remember that all revenues and expenses, they flow through the income statement and they're all part of equity. Okay, revenues and expenses, they're all going to be part of equity. So there we go. We've got pretty simple straightforward entry, right there, accounts receivable and revenue. Let's do our first uh thing that could decrease our revenue and this is a sales return. So if the company, excuse me. If the customer returns the goods to the company, well this is a sales return right? They're not happy with the good and they get a refund. So the customer returned 100 units of things to T. O. S. Using the money back guarantee policy. Well these 100 units right? We said that the 100 units and we had a sales price it was $12 yep. Up above we had a sales price of $12. So this is the amount of money we would have had to return to the customer right? 1200 $1,200 worth of goods. Now let's assume that this 100 that the customer returns. They were part of this on account. Right? This is the customer risk let's say this was all one order where 11 customer ordered 500 things. Those things arrived at their warehouse, they inspected them and they said hey this batch this box of 100 things. They don't meet our standards. So take them back. Okay so remember they haven't paid us yet. Right this was on account. So we have to decrease that Uh that account receivable. But the main thing I want you to see here is that we're gonna be debuting instead of decreasing our revenue directly. Right? We have our revenue account up here for 6000 from the previous entry. Well we're not gonna just debit revenue to decrease it. We're going to debit an account called sales returns. Okay And this is a contra account to revenue. So this is where revenues go up with a credit. These sales returns are going up with a debit to decrease our revenue. Right? So there's gonna be uh What do we say? They're gonna be joined together when we find our net amount of revenue, we're gonna have our gross revenue up top with that 6000. And then we're gonna be decreasing it for these types of things. Like a sales return. Okay so this sales return was for 1200. Alright so when we think about our net revenue at this point the net amount we would have the 6000 minus the 1200. Right? We have a credit for 6000 in the revenue account and a debit for 1200 in the sales returns account. Okay. And we're going to credit here accounts receivable, right? Because we're no longer expecting that customer to pay us the 1200 because they returned the goods. Right. So they no longer owe us the money we got the goods back, they owe us $1200 less. Okay So they're still gonna owe us right because the a. R from the previous entry they were gonna owe us 6000 but now they returned some of it. So they're gonna owe us a little less based on that credit. Okay. So if we saw in the previous entry that our A. R. Had gone up by 6000, our revenue up by 6000. Let me keep those in here. A. R. Had gone up by 6000 and our revenue was up by 6000. Well now we made an entry to decrease our a. r. by 1200 and we're gonna decrease our equity with this sales return By 1200. Okay? So notice that we stay balanced here as well. Cool. Alright, so let's pause real quick and in the next video we'll talk about the sales allowance. All right, let's do that now.