When a customer purchases merchandise on credit, the accounts receivable balance on the seller's balance sheet is increased from the sale. If the buyer decides to return the goods at a future date, the accounts receivable balance is reduced by the amount of goods it returns to the seller.
A company's outstanding accounts receivable balance comprises the credit sales made to its customers in previous periods for which the cash on the transaction remains uncollected. When former goods and merchandise is returned, the accounts receivable balance is reduced on the company's books.
To illustrate how a return on credit sales affects a company's accounts receivable balance, assume that on February 28, a company has an accounts receivable balance of $318,000. On March 23, a customer returns merchandise in the amount of $14,000 from a credit sale previously made on February 16.
When the seller recorded the initial sales transaction on February 16, the accounts receivable balance was increased by $14,000 to represent the legal claims that it has on its buyers to collect cash from them at a future date.
Since the former credit sale is no longer considered outstanding, the accounts receivable balance is reduced by $14,000 when the goods are returned. Assuming that no credit sales or payments are received in March, accounts receivable would have a balance of $304,000 at March-end, the result of February's ending balance less the return amount.
