Key Concepts
Sales revenue is recorded in the Sales revenue account whenever goods are sold. When a customer returns goods (due to defects or wrong specifications), the return is recorded in the Sales returns account — a contra-income account that reduces sales revenue.
The Income summary account is a temporary account used only at the end of the financial period to gather all income and expense balances before calculating the final profit or loss for the period.
At the end of the financial period, the Sales revenue and Sales returns accounts are closed (reduced to zero) to the Income summary account. This resets the accounts to zero so that each financial period's income and expenses are tracked separately.
| Account | Debit | Credit |
|---|---|---|
| Sales revenue | Sales revenue | Income summary |
| Sales returns | Income summary | Sales returns |
Returns go into the Sales returns account — never debit Sales revenue to reverse the original entry.
| Dr | Cr | |
|---|---|---|
| Sales returns | ✓ | |
| Cash in hand / Cash at bank / Trade receivables — [Customer] | ✓ |
Closing entries: to reduce income and contra-income accounts to zero, income accounts are debited and contra-income accounts are credited:
- Dr Sales revenue → Cr Income summary
- Dr Income summary → Cr Sales returns
| Date | Transaction |
|---|---|
| 3 Mar | Sold goods for cash, $1,200 |
| 8 Mar | Sold goods on credit to Marcus, $3,500 |
| 15 Mar | Marcus returned $400 worth of goods due to wrong specifications |
| 31 Dec | Financial year end — close relevant accounts |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 3 Mar | Cash in hand | 1,200 | |
| Sales revenue | 1,200 |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 8 Mar | Trade receivables — Marcus | 3,500 | |
| Sales revenue | 3,500 |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 15 Mar | Sales returns | 400 | |
| Trade receivables — Marcus | 400 |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 31 Dec | Sales revenue | 4,700 | |
| Income summary | 4,700 | ||
| 31 Dec | Income summary | 400 | |
| Sales returns | 400 |
Net sales revenue transferred to Income summary = $4,700 − $400 = $4,300.
Debiting Sales revenue when recording a sales return — Sales returns go into their own account (Dr Sales returns). Do not reverse the original sales entry.
Forgetting the closing entry for Sales returns — Both Sales revenue and Sales returns must be closed at year end. Students often close Sales revenue but leave Sales returns open.
Wrong account for the credit side of a sales return — If the customer bought on credit, the return reduces Trade receivables (Cr Trade receivables), not Cash at bank.