Q. Sales returns affect both revenues and cost of good?

When a company sells merchandise to customers then it transfers the cost of the merchandise from an asset account that is Merchandise Inventory to an expense account (Cost of Goods Sold). The company makes this transfer for the reason that the sale reduces the asset and the cost of the goods sold is one of the expenses of making the sale. Therefore the Cost of Goods Sold account accumulates the cost of all the merchandise that the company sells during a period. A sales return as well requires two entries one at selling price and one at cost. Presume that a customer returned merchandise that cost USD 20 and originally sold for USD 32. The entry to decrease the accounts receivable and to record the sales return of USD 32 is

Dec.   31    Loss from Inventory Shortage (-SE)     15
                  Merchandise Inventory (-A)                  15
                  To record inventory shortage

The entry that enhances the Merchandise Inventory account and decreases the Cost of Goods Sold account by USD 20 is as follows

Dec.   31     Income Summary                              200,000
                  Cost of Goods Sold                            200,000
                  To close Cost of Goods Sold account to Income
                  Summary at the end of the year.

Sales returns affect both cost of goods sold and revenues because the goods charged to cost of goods sold are actually returned to the seller. In contrast sales allowances granted to customers affect merely revenues because the customers don't have to return goods. Therefore if the company had granted a sales allowance of USD 32 on March 17 only the first entry would be required.