Accounting treatment for store credit?

Question

I just got store credit when I returned some bad juice. This left me wondering. Which accounts receive the entries when a store issues store credit? For example, when I made the payment for the juice, they must have made two entries --one for cash received (positive) and one for inventory (negative). In this case I believe the following to hold true: 1. They will have to write down the inventory (bad juice). 1. They will not change the cash account because they did not give me any cash back. Furthermore, the store credit expires in the next 6 months. If I do not use it by then won't they simply have a positive cash flow but no revenue item corresponding to it? Are there accounting policies to explain such cash flows?

Answer 1

In addition to taking the juice back into inventory and then writing-off the bad juice (Debit Inventory, Credit Cost of Goods sold; Debit Spoilage, Credit Inventory) ,the store will debit Sales Returns and Allowances (a contra-revenue account), Debit Sales Tax Payable, and credit a liability such as Accounts Payable. If the store credit is not used within the next six months, they will debit the Accounts Payable account and credit an "other income" account such as Expired Store Credits.