Accounting for sales with a right of return

Many companies allow customers to return goods for any reason within a specified timeframe, even after the goods have been transferred to the customer. A right to return may be given for various reasons, such as customer dissatisfaction with the product or the fact that the customer changed his mind.

Keywords: Mazars, Thailand, Accounting, TFAC

22 October 2020

Returns can be made in exchange for a full or partial refund or another product, or credit that can be used later.

Sales with a right of return create accounting issues because the amount of consideration to which the companies will ultimately be entitled is uncertain.

The Federation of Accounting Profession of Thailand (TFAC) has issued guidelines on how to account for sales with a right of return. An entity must recognize sales with a right of return as follows:

Revenue recognition is limited to the amount of revenue that can be measured reliably or where it is probable that the economic benefits associated with the transaction will flow to the entity, or where it is likely that a significant reversal will not occur or that the goods will be returned.

As a result, revenue should not be recorded for any portion of a sale that the entity expects to be returned.

A refund liability must be recognized (a refund liability must be established for the expected amount of refunds and credits to be issued to customers).
Inventory to be returned corresponding to assets and adjustments to the cost of sales must be recorded for items expected to be returned, based on the carrying amount of the asset transferred less costs to recover.

Examples

On 15 March 2020, Company A entered into a contract with a customer to sell 2,500 items of a product at a price of THB 1,000 per item, where the cost per item was THB 600. The total value of the contract was THB 2.5 million. The terms of the agreement allow for returns for any reason for up to 30 days for a full refund.

Company A uses the expected value of returns to calculate and determine the transaction price. Therefore, sales revenue will be reduced to reflect the expected value of returns using the rules on variable consideration.

In 2020, Company A expected that 2,425 items would not be returned, and that the associated costs of goods sold and inventory to be returned would not be material. In addition, inventory returned to the company could be resold to another company at a profit.

When the goods were transferred to the customer, Company A did not recognize sale revenue of 75 items (2,500 – 2,425) at THB 1,000 each, for a total of THB 75,000, in the financial statements for the year ending 31 December 2020.

The accounting records must be as follows:

Accounts	Debit	Credit
Cash or cash at bank	2,500,000		(2,500 items * 1,000 per items)
Sales revenue		2,425,000	(2,425 items * 1,000 per items)
Refund liability		75,000	(75 items * 1,000 per items)

Cost of sales	1,455,000		(2,425 items * 600 per items)
Inventory to be returned	45,000		(75 items * 600 per items)
Inventory		1,500,000	(2,500 items * 600 per items)

Note: Inventory to be returned must be recorded separately from general inventory