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   Sales Returns and Allowances
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Sales Returns and Allowances
What are sales returns and allowances?

Definition

Sales Returns and Allowances is a contra-revenue account deducted from Sales. It is a sales adjustments account that represents merchandise returns from customers, and deductions to the original selling price when the customer accepts defective products.

Classification and Presentation of Sales Returns and Allowances

"Sales Returns and Allowances" is a contra-revenue account. It is deducted from "Sales" (or "Gross Sales") in the income statement. Sales returns refer to actual returns of goods from customers because defective or wrong products were delivered. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price.

In the income statement, "Sales Returns and Allowances" is deducted from "Sales", along with "Sales Discounts", to arrive at the "Net Sales". Here's an example:

When only "Net Sales" is presented in the income statement, its computation is shown in notes to financial statements.

Sales Returns and Allowances Journal Entries

For credit sales or sales on account, the amount is removed from the receivable balance by crediting the customer's account:

If the return or allowance involves a refund of the customer's payment, "Cash" is credited. Or, a payable account is credited if the refund is to be made at a future date.

Examples

1. ACBE Company sold 1,000 bottles of milk to Mr. Dwight for $0.50 per bottle, on account. The journal entry to record the sale would be:

Later on, Mr. Dwight returned 4 boxes containing 200 bottles because they were expired. Apparently, ACBE sent some wrong boxes to the customer. ABCE agreed to deduct the amount from the customer's account. The journal entry would be:

2. MONTANA Company sold a computer set to Darwin for $1,000. Darwin later on returned the product after discovering a missing part. Darwin agreed to accept the product after being refunded $80. The journal entry to record the sales adjustment would be:

Note: Some companies do not maintain a 'Sales Returns and Allowances" account. They record customer returns by directly debiting "Sales". However, it is good to maintain the aforementioned account to be able to track returns and allowances and make decisions about them if necessary.