At December 31, John Photography Supplies estimated that approximately 5 % of merchandise sold will be returned. Sales Revenue for the year was $ 90 comma 000 with a cost of $ 58 comma 000 . Journalize the adjusting entries needed to account for the estimated returns.

Date                         Description                                Debit           Credit

31st Dec              Sales Revenue                               $4,500

                          Refunds Payable                                               $4,500

31st Dec           Inventory Estimated Returns             $2,900

                        Cost of Goods Sold                                             $2,900

Explanation:

First, the obvious facts about the question

Estate of returned merchandise = 5%

Sales revenue for the year = $90,000

Cost of goods sold = $59,000

Step 1: Sales Revenue is already $90,000 Credit entry (it is an income) and as such any return will have a debit entry to reduce the revenue as follows

Return = 0.05 x $90,000 = $4,500

This same refunds will also go into the refunds payable account as a current liability  (credit entry)

Step 2: The returns will also affect the inventory and cost of sales as follows

0.05 x $58,000 =  $2,900

This will increase the inventory 9debit side and reduce cost of sales credit side.

Journal Entries

Date                         Description                                Debit           Credit

31st Dec              Sales Revenue                               $4,500

                          Refunds Payable                                               $4,500

31st Dec           Inventory Estimated Returns             $2,900

                        Cost of Goods Sold                                             $2,900

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