When merchandise returns are anticipated, an allowance for sales returns should be recorded as a contra account to accounts receivable and sales revenue also should be reduced by the anticipated sales returns.

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Knowledge Check 01 At the end of its first year of operations, Loring Industries estimates that sales returns in the amount of $20,000 will occur during Year 2. The cost of the inventory expected to be returned is $12,000. All of Lorings sales are made for cash and the company uses a perpetual inventory system. Assume that no returns have occurred as of the end of Year 1. Prepare the appropriate adjusting journal entry to record the expected sales returns and the inventory expected to be returned in Year 2.

Journal entry worksheet 2 Record the $20,000 estimate of expected returns from customers Note: Enter debits before credits. Event General Journal Debit Credit 01 Record entry Clear entry View general journal