How to use the sales returns allowance reserve calculator
- Enter the sales that can still be returned, such as the sales of the last return window.
- Enter the return rate you expect, based on your own history of returns.
- Enter the reserve you already hold. Open the advanced options to enter the share of the price that is the cost of the goods.
- Read the increase or decrease needed, the adjusting entry and the effect on profit.
Formula
Reserve needed = sales x expected return rate
Adjustment = reserve needed - reserve already held
Stock expected back = reserve needed x cost share. Profit effect = reserve - stock expected back
A positive adjustment is debited to sales returns and allowances and credited to the returns reserve.
$400,000 of sales with 6% expected to come back
The reserve needed is $400,000 x 6% = $24,000. The books hold $18,000, so the reserve must rise by $6,000. The entry debits sales returns and allowances $6,000 and credits the returns reserve $6,000.
If the cost of the goods is 62% of the price, the stock expected back is $24,000 x 62% = $14,880, so the profit effect of the reserve is $24,000 - $14,880 = $9,120. If you already held $30,000, the reserve would instead fall by $6,000, and the entry runs the other way.
Why a reserve is set up
When goods can be sent back, a sale is not fully certain on the day it is made. Estimating the part that will come back and setting it aside matches the expected refund to the period of the sale, instead of letting it hit a later month. The reserve is a liability, and the matching debit reduces net sales.
The estimate is only as good as the rate. A rate taken from the last few years of returns for the same kind of goods is a better base than a guess, and a seasonal business may need a different rate for different months. The presets show a higher rate so you can see the size of the effect.
Stock and profit
A returned item usually comes back into stock, so a refund is not the whole loss. The advanced field lets you enter the cost share, and the tool shows the stock expected back and the part of the reserve that really hits profit. Whether the stock value is recorded in the same entry, and how returns are presented, depends on your accounting framework. See the Allowance for Doubtful Accounts Calculator for another reserve based on a loss rate, the Journal Entry Generator to write the entry, and the Prepaid Expense Amortization Calculator for costs paid ahead. The Accounts Receivable Aging Report shows what customers still owe.
Assumptions and limits
- One return rate applies to all sales entered.
- Returned goods are resold at cost with no loss in value. Damaged returns need a lower cost share.
- The return rate and the cost share are examples. Use your own figures.
- This is the arithmetic of the estimate and not advice on how to record it.
Frequently asked questions
What sales should I enter?
The sales that can still be returned at the end of the period, which means those inside the return window and not only the latest month.
What does a negative adjustment mean?
The reserve you hold is larger than the estimate, so part of it can be released. The entry debits the reserve and credits returns and allowances.
How is the cost share used?
It turns the reserve into the value of the stock you expect to get back. The rest of the reserve is the profit you expect to lose on those sales.
How often should I change the return rate?
Review it when you have a new set of returns data, for example every quarter, and after any change to the return policy.