Sales returns and allowances definition
/What is Sales Returns and Allowances?
Sales returns and allowances is a deduction from sales that shows the sale price of goods returned by customers, as well as discounts taken by them to retain defective goods. When this amount is large in proportion to total sales, it indicates that a business is having trouble shipping high-quality goods to its customers.
Accounting for Sales Returns and Allowances
This line item is the aggregation of two general ledger accounts, which are the sales returns account and the sales allowances account. Both of these accounts are contra accounts, which means that they offset gross sales. The natural balance in these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account.
The two accounts may sometimes be combined into a single account in the general ledger. This typically happens when the balances in these accounts are relatively small, so there is no point in tracking returns and allowances separately.
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Presentation of Sales Returns and Allowances
Sales returns and allowances is a line item appearing in the income statement. This line item is presented as a subtraction from the gross sales line item, and is intended to reduce sales by the amount of product returns from customers and sales allowances granted. It is followed in the income statement by a net sales line item, which is a calculation that adds together the gross sales line item and the negative amount in the sales returns and allowances line item.
Best Practices for Sales Returns and Allowances
A detailed record of the larger sales returns and allowances transactions should be routinely prepared and forwarded to the senior management team, so that they can gain an understanding of the reasons why these deductions are occurring. Better yet, conduct an investigation into the reasons for each one, and include it in the report. This is time-consuming, but can result in management actions that reduce the amount of sales returns and allowances.