From Steve Laube: Every traditionally published author needs to understand the principle of “Reserves Against Returns” which is an integral part of publishing economics. It can reduce the amount of money an author receives in their royalty statement. It is usually a shock and elicits a phone call to their agent crying “What happened to my money?”
Did you realize that book publishing is the only “hard goods” industry where the product sold by the supplier to a vendor can be returned? This does not happen with electronics, clothing, shoes, handbags, cars, tires…you name it. If it is a durable good the vendor who buys it, owns it (which is why there are Outlet Malls – to sell the remaining inventory). Except for books. Somewhere along the line the publishers agreed to allow stores to return unsold inventory for credit. In one sense, publishers are selling their books on consignment. Bargain books are actually resold by the publisher (after getting returns or to reduce overprinted inventory) to a new specialty bargain bookseller or division of a chain (which buys the bargain books non-returnable).
Consequently book contracts have a clause allowing the publisher to establish “a reasonable reserve against returns.” By “reserve” they mean a pool of money withheld from the author…holding that money in “reserve.” The intention of the clause is to protect the publisher against paying the author for books that have been shipped and billed to a store but may eventually be returned to the publisher.
Link: Many Happy(?) Returns! –