Final answer:
Estimated returns are recognized when the related sales are made, using historical and industry data. An adjusting entry debits Sales Returns and Allowances and credits Estimated Returns Liability to account for future returns.
Step-by-step explanation:
Estimated returns should be recognized in the accounting period in which the related sales are made. Companies estimate the returns based on historical data and industry standards to match the expenses with revenues as per the matching principle. The adjusting entry made at the end of the reporting period usually involves an increase in a sales returns and allowances account and an increase in a liability account such as 'estimated returns liability', reflecting the anticipated future returns.
The typical journal entry to recognize additional future returns is a debit to Sales Returns and Allowances and a credit to Estimated Returns Liability. This adjusting entry ensures that the financial statements present a more accurate picture of the net sales and liabilities expected from returns.