Although sales returns and sales allowances are technically two distinct types of transactions, they are generally recorded in the same account. Sales returns occur when customers return defective, damaged, or otherwise undesirable products to the seller. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price.
If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return. This credit memorandum becomes the source document for a journal entry that increases (debits) the sales returns and allowances account and decreases (credits) accounts receivable.
A $100 allowance requires the same entry.
In the sales revenue section of an income statement, the sales returns and allowances account is subtracted from sales because these accounts have the opposite effect on net income. Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales. High return levels may indicate the presence of serious but correctable problems. For example, improved packaging might minimize damage during shipment, new suppliers might reduce the amount of defective merchandise, or better methods for recording and packaging orders might eliminate or reduce incorrect merchandise shipments. The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account.
FAQs
Sales returns and allowances are refunds or credits given to customers for returned products or products that they are allowed to keep without full payment. Sales returns and allowances are deducted from sales revenue when net sales are calculated.
Is sales return an asset or expense? ›
Sales returns are known as a contra revenue account and they have a direct effect on the net income, thereby reducing the income. They cannot be considered as an expense but they do contribute to the loss of income. Also read: Cash Book.
Do you close sales returns and allowances? ›
Since the sales discount and sales returns and allowances are temporary accounts, these are needed to be closed during the end of the reporting period. Since the account balances are debits, these are credited when preparing the closing entries with a corresponding debit to the income and expense summary.
What are sales returns and allowances and sales discounts? ›
Sales returns and allowances and sales discounts, are both contra revenue accounts with debit balances that are deducted from sales revenue to arrive at net sales and cost of goods could also be deducted from sales revenue, but sales revenue is not deducted from itself.
What is the journal entry for purchase returns and allowances? ›
The journal entries are to debit accounts payable to reduce the amount owed to the supplier by the amount of the allowance, and a credit to purchase returns and allowances to reduce the amount the unsatisfactory items will add to the inventory.
How do you record sales returns and allowances? ›
Companies can record sales returns and allowances as a reduction from sales revenue or in a separate sales returns and allowances account, which is a deduction from sales revenue to record customer returns and allowances granted to customers.
How to treat sales return in accounting? ›
When merchandise is returned, the sales returns and allowances account is debited to reduce sales, and accounts receivable or cash is credited to refund cash or reduce what is owed by the customer. A second entry must also be made debiting inventory to put the returned items back.
What is sales returns and allowances on a balance sheet? ›
Sales returns and allowances is a contra revenue account with a normal debit balance used to record returns from and allowances to customers. The account, therefore, has a debit balance that is opposite the credit balance of the sales account.
How to calculate sales returns and allowances? ›
The formula to compute it is gross sales revenue less net sales revenue. When a customer returns a product or requests an allowance, a credit note in duplicate is issued. This is recorded in two accounts and given the following accounting treatment: Reduce the revenue account and Increase the contra account.
Is a sales return a debit or credit? ›
A sales return account is always debited in the books of account as it is an expense account.
Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales.
What is the difference between a sales return and a sales allowance? ›
What are sales returns and allowances? A sales return occurs when a buyer sends a product back to a seller for a partial or full refund. An allowance is a retroactive discount a customer receives when they contact a company about a minor but noticeable defect with its product.
What is the normal balance of sales returns and allowances? ›
The normal balance of the Sales Returns and Allowances account is a debit balance. The sales returns and allowances account is debited when the customers return the goods which were already sold to them. The account holds a contra-revenue balance.
What category is sales return? ›
Sales return is considered a contra revenue account as it has an opposite effect on the net income. In other words, it reduces the net income.
What type of account is sales returns? ›
Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales.
Does sales returns go on the balance sheet? ›
To calculate net sales on a balance sheet, you'll start with your gross sales. Then, you'll deduct your returns, discounts, allowances, and other relevant losses. The final number, after deductions, will be your total net sales.
Is a sales return a liability? ›
Some contracts with customers may result in refund liabilities owed to customers. The most common of such refund liabilities are return provisions in sales contracts that permit the customer to return the product if certain circ*mstances arise.
