Which entry correctly records a sales return and an estimate for expected returns?

• A. Record a separate liability for returns.
• B. Record a reduction of revenue and accounts receivable; create the estimate for expected returns as a contra-revenue account.
• C. Do nothing until returns are actual.
• D. Record an increase in revenue and accounts receivable.

Answer: (B)

Anticipating returns requires adjusting revenue and receivables in the period of sale to reflect what you realistically expect to collect. When a sale is made, you normally recognize revenue and accounts receivable, but because some customers will return goods, you offset part of that revenue with a contra-revenue amount and reduce the receivable for the estimated returns. The correct entry uses a contra-revenue account to record the estimate of returns and lowers accounts receivable accordingly: debit the sales returns and allowances (a contra-revenue account) and credit accounts receivable for the estimated amount. This presentation shows net revenue and net receivable that align with expected results, while still keeping track of the estimated returns via the contra-revenue balance. Other approaches—such as creating a separate liability for returns, waiting until actual returns occur, or increasing revenue and AR—would overstate income or assets and don’t reflect the expected refunds.