When you offer your customers the option to purchase on account, your "Accounts Receivable" account helps you track any open balances by customer. Adjusting the account regularly when payments are received is important for a real-time look at any outstanding accounts. In some cases, accounts receivable charges need to be reversed in the ledger, either because an account has been deemed unrecoverable or if your customer returns the product. Understanding how to handle these transactions can help you keep your ledger and your inventory up-to-date.

Product Returns

Create a journal entry starting with a credit to the "Accounts Receivable" account for the amount of the return. For example, if the customer is returning a $250 product order, credit "Accounts Receivable" in the amount of $250.

Enter the balancing debit on the next line of the entry. Debit the "Sales Returns and Allowances" ledger account for $250.

Create an additional entry to record the physical return of inventory. Credit the "Cost of Goods Sold" account for the cost of the goods sold. Debit your "Inventory" account for an equal amount to account for returning the product to inventory. Skip this step if the item cannot be sold again and will not be returned to inventory.

Bad Debt

Create a journal entry to credit the "Accounts Receivable" account for the amount of the account. For example, if you declare a $700 account unrecoverable, credit "Accounts Receivable" for $700.

Debit the "Bad Debt Expense" account for the same amount. If you are writing off a $700 account, debit "Bad Debt Expense" for $700.

Credit "Bad Debt Expense" for the balance of the payment if you receive a payment on the account after writing it off. Debit the cash account for an equal amount to record the deposit.

Tip

It is important to update your inventory records if you receive a product back as a return and you are able to sell it again.

Warning

Journal entries must balance, or reflect an equal dollar amount in both the credit and debit columns. Make sure your ledger entries are in balance before posting.