The cost into the inventory is lost, so when a credit memo is posted it has a direct effect on net income. If the merchandise is damaged, there will be no restoring of the product. The financial aspect of a credit memo is that it will usually affect the bottom line. By understanding when and how to use credit memos, companies can take advantage of their benefits while being mindful of potential risks associated with their. The key part is that the adjustment needs to have approval from executive management. This is usually done through an adjustment in the allowance for bad debt. It should be noted the entry assumes the inventory returned is not saleable any longer and therefore not put back into inventory.Īdditionally, a credit adjustment can be issued for a customer whose account balance is deemed uncollectible. The net effect of the entry is to reduce the respective receivable and the corresponding revenue.īoth the balance sheet and the revenue accounts are netted to show actual effect. This trail is key because a company needs to maintain historical sales transaction data to be able to forecast future sales expectations. This entry leaves the ‘audit trial’ of the original revenue entry. The journal entry for the original transaction and for the credit memo would look like this: They return $700 of the product back to Company A on February 17, 2020. The customer realizes part of the products are damaged and unsaleable. While having a product returned due to a defect, wrong item, or incomplete order is not what a business owner wants, the process can help develop good insights into their customers.įrom the accounting standpoint, the credit should be treated as an adjustment to revenues and receivables.Īssume Company A sold $1,250 of products to a customer on January 15, 2020.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |