Technically, sales returns and allowances are two very different types of transactions. But they are recorded in the same account. When the customer returns a defective or damaged product, then sales returns occur. When the customer agrees to keep this defective product in return for reducing the price of the product, then sales allowances occur.
For example, if a customer returns $100 worth of product, then the company prepares to return to the amount to him. The credit memorandum account is ready for this sales return. This becomes the source document by which a journal entry is made.
The journal entry increases the series returns and allowances account. It reduces or decreases the accounts receivable.
The journal entry is recorded as a reduction from the transaction to arrive at the net sale. Such trades are collectively reduced from the Gross sale to arrive at the figure of Net sale.
Customers often return defective, unsuitable or damaged merchandise, and they expect their money return. Retailers return the amount and record this amount as sales return in their transaction book.
For example, a clothing store customer gives back a pair of pants and get a refund because the pant is oversized. This is an example of a sales return transaction.
When customers get a defective product, they wish to get a price discount on the same. The amount reduced from the price of the product and returned to the customer is called sales advances.
For example, a customer requests a reduction of cost for loose threads on the pant that he is buying. And thereby he receives a certain percentage off. That is called as Sales Allowance.
Recording Sales Return and Allowances
People usually combine the sales returns and allowances of business into one single account. This account’s total is reduced from the gross sales of the business to arrive at the figure for net sales. It is essential to track these transactions because it helps the business owner to understand the Sales return and allowances vis-a-vis total sales.
A very high percentage of returns allowances show that there are difficulties with inventory and quality or the shipping of the product. Although it is very uncommon tracking sales returns and allowances into a different account will help the business owner to separate the total number of customers who did not want their purchases with them and the ones who did.
Advantages of Separate Entries
There are several advantages to having separate entries. Deep insights can be gained from this differentiation. A very high level of allowances may indicate higher customer satisfaction because customers have chosen to keep it with them. However, if discounts are given for all the flaws in the product, then there could be quality control in manufacturing which needs to be addressed on priority.
Advances versus sales return analysis will indicate a tough time that is invested in dealing with the damaged product. Sales returns are more labor-intensive then allowances.
A considerable benefit would suggest that customers are willing to purchase or less than perfect merchandise which will create a discount section for all the flawed items instead of having them sent back to the manufacturer.
This will also generate additional revenue for the store.
Sales – $ 9000
(-) Sales Discount – 800
Sales Returns and allowances – 10
Net sales – $ 8100
When Net Sales are mentioned in the Income statement, then its calculation is shown in the notes section to financial statements.
A company sold 2000 milk bottles to Dr. Barney for $1 per bottle. The journal entry would be:
Accounts receivables: 2000
Sales – 2000
Later Dr. Barney said that four boxes containing a hundred bottles were expired. The company agreed to reduce that amount from the account of the customer. In this case, the journal entry would be:
Sales and Acc receivables – $ 100
Accounts receivables – $ 100