Usually, companies provide a breakup of the contra revenue account to calculate the net sales figure in the income statement. Both sales returns and allowances represent a reduction in a company’s revenues after it makes sales. The accruals concept requires companies to account for revenues when they occur.
Sales returns, allowances and discounts are some of the examples of this type of contra account. Some companies may keep these accounts together due to their similar nature. However, others will separate them into two accounts for better presentation and processing. Therefore, sales returns should not cause too much concern for companies.
When you make an allowance, you debit the sales allowance account and credit accounts receivable. For returns, you credit accounts receivable and debit sales returns. You report the contra account amounts for a given accounting period on your income statement, deducting them from gross sales revenue.
The financial accounting term sales returns and allowances is used to describe the value of unsatisfactory merchandise returned by customers or refunds issued by the company to customers. Sales returns and allowances is found on a company’s income statement. In short, a sales allowance does not involve a physical return of goods. Instead, companies allow a specific deduction from the original price agreed with customers. These features differentiate sales allowances from sales returns.
How to Record Sales Returns and Allowances? (Explanation and Journal Entries)
After assessing the goods, XYZ Co. returned products worth $50,000 as they suffered damages during the delivery. ABC Co. compensated XYZ Co. for the returns by reducing its accounts receivable balance. The journal entries for sales returns from XYZ Co. are as follows. For example, suppose you deliver an $860 order to one of your regular customers. They feel the quality is sub-optimal, so you give them a 5 percent allowance of $43. Entering that as a contra account gives a better picture of what’s going on than just adjusting accounts receivable to show an $817 sale.
Alternatively, a customer may decide to return an unsatisfactory product. Sales allowances are also useful if the customer isn’t satisfied with the products you shipped. A retail store, for example, complains that some of the Christmas ornaments you shipped arrived broken.
What are Sales Returns and Allowances?
This is important because it can help businesses to identify problem products. For example, a product with a high return or allowance rate could be an indicator that there is something wrong with it. It could be that the product is defective, or it could be that the product is not meeting customer expectations. In either case, it is important for businesses to be aware of this so they can take action to fix the problem. The credit to the Accounts Receivable account reduces the amount of accounts receivable outstanding. Like other contra accounts, the contra revenue account goes against revenues in the income statement.
But gradually when the business expands, it becomes inconvenient to record such a large number of transactions in a single book. So, the book of original entry or Journal is further divided into different special journals called ‘Subsidiary Books’. Firstly, all the transactions are recorded in the relevant subsidiary books and afterwards posted to the ledger accounts.
How to Record Sales Returns and Allowances
For example, you usually give customers 30 days to pay their accounts, but you offer 2 percent off if they pay within 10 days. Sellers do this when they need to juice cash flow or decide accounts receivable is too high. A sales allowance is defined as when a customer is allowed to keep a product without paying for it or without paying the full amount owed for the entire purchase price. In each of these cases, the buyer is still allowed to keep the product, and they are not required to pay or continue paying for it. In other words, the buyer does not send the merchandise back to the seller but receives a reduction in the total amount that they have to pay the seller for the order.
Add sales returns to one of your lists below, or create a new one. All returns are related to quality defects and not incorrect deliveries. The path that the returned merchandise takes often has to be tracked in detail. Return on sales should only be used experience wave workers to compare companies that operate in the same industry, and ideally among those that have similar business models and annual sales figures. A grocery chain, for example, has lower margins and therefore a lower ROS compared to a technology company.
Is sales return an asset or equity?
No, sales revenue is not considered an asset. For accounting purposes, sales revenue is recorded on a company's income statement, not on the balance sheet with the company's other assets.