Sales allowance refers to reduction in the selling price when a customer agrees to accept a defective unit instead of returning it to the seller. It is normally recorded under the account "Sales Returns and Allowances".
A sales allowance, unlike sales return, involves no physical return of the product. Instead, the business gives a certain deduction from the original price of the item. If the customer agrees to keep the product, the reduction in the price is recorded as sales allowance.
Sales allowances are recorded under the "Sales Returns and Allowances" account. This is a contra-revenue account. It is shown as a deduction from "Sales" in the income statement.
If the sale was made on account (on credit) and a sales allowance was granted, the journal entry would be to decrease the customer's account by crediting it. The journal entry would be:
| Dr. | Sales Returns and Allowances | xx.xx | |
|---|---|---|---|
| Cr. | Accounts Receivable | xx.xx |
If the sale was made for cash, the entry for sales allowance would include a credit to "Cash" if the amount was refunded, or to a liability account if it is to be paid in the future.
| Dr. | Sales Returns and Allowances | xx.xx | |
|---|---|---|---|
| Cr. | Cash / Payable to Customer | xx.xx |
1. MGT Trading sold and delivered a dining table set to Mr. Davis for $1,200. Later that day, Mr. Davis noticed that one of the chairs were not in good condition. Nonetheless, Mr. Davis agreed to accept the set with a reduction in its selling price. MGT refunded $100 to Mr. Davis. The journal entry for the refund would be:
| Dr. | Sales Returns and Allowances | 100.00 | |
|---|---|---|---|
| Cr. | Cash | 100.00 |
2. ABC Company sold 600 cans of evaporated milk to DEF Company on account at $2 per can. DEF discovered that the cans do not have the right packaging. Since DEF is after the contents, it agreed to accept the items. ABC adjusted the price to $1.80 per can. The total deduction then would be $120 (600 x $0.20). The journal entry in the books of ABC to record the adjustment would be:
| Dr. | Sales Returns and Allowances | 120.00 | |
|---|---|---|---|
| Cr. | Accounts Receivable - DEF | 120.00 |
The amount recorded as sales allowance is the amount of reduction in the original sales price.
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