How to Account for Sales Returns and Allowances
Difference between a sales allowance and a sales return
The specifics of the transaction determine how a sales allowance and a sales return differ from one another. With a sales allowance, the customer agrees to accept the product as-is in exchange for a price reduction, even though they may be unhappy with the product they received in either situation. A sales return, in contrast, would indicate that the customer is dissatisfied with the item they have purchased and does not want to keep it. They prefer to return the item in exchange for a full refund of their purchase price.
What is a sales allowance?
A price reduction that a seller initiates due to an issue with the buyer’s order is known as a sales allowance. This can refer to a number of different situations that a seller determines, such as the buyer receiving a defective product, not receiving all of their order, or paying the wrong price for an item. Instead of the buyer returning the item, the seller provides the buyer with a sales allowance.
Giving customers sales allowances has a number of advantages, including:
Better customer relationships
Many clients appreciate doing business with a company that tries to correct its errors. Many times, circumstances won’t be ideal, but what a business does in those situations can have an impact on the customers it serves. If you deliberately lower the price, the customer will perceive this as a good faith effort on your part and be satisfied.
Less money spent
Accepting a return on an item can be expensive because you usually have to try to sell it, spend money to fix it so that someone else can buy it, or throw it away and record the item as a bigger loss.
Less time spent
It might take longer to process a sales return than a sales allowance. With a sales allowance, you can give a customer a discount or refund them money, neither of which typically requires an employee to put in a lot of work. However, a sales return may involve making arrangements for product pickup from the customer’s home or providing the customer with a return label and instructions for returning the item on their own, both of which solutions typically involve more logistics than a sales allowance would.
Ability to quality control
With accurate accounting, you’ll be able to keep track of any sales allowances, including their amount and the justifications for giving them to your clients or suppliers. You can spot patterns in your allowances over time, which may indicate that your business is experiencing shipping problems or that a component of your production process is broken. Additionally, you can determine which clients preferred to proceed with a product return while others preferred to accept the sales allowance.
Accounting for sales allowances
To keep accurate bookkeeping records, you must record the transaction when you give a customer a sales allowance. Making sure a sales allowance account is included in the financial records is one of the initial steps. This will assist you in determining how much sales allowance to allocate for each client who accepts your company’s offer.
When you give a customer a sales allowance, you should record it right away to avoid any record-keeping errors. Depending on how the customer purchases the product, you must record the information differently. Customers typically either have an account with your business, which is typical in business-to-business (B2B) sales, or they pay with cash or personal credit, which is a typical transaction type for businesses that sell to consumers (B2C).
No matter how your customer chooses to pay you, you must record the price reduction as a debit on the “sales returns and allowances” account line. You would also record your sales allowance amount as a credit under your “accounts receivable” account line if the customer or vendor had an account they used to buy goods and used that account to purchase the item for which you were providing a sales allowance. The sales allowance sum might also show up in your financial records as a credit on the “cash” line for any customer who pays with cash for the product.
At the end of a reporting period, you’ll record the amount in your sales allowances account, also known as a contra-revenue account, on your income statement. Because sales allowances have an impact on the company’s net income, you would later deduct these amounts from your gross sales revenue. Additionally, you’ll be able to see more clearly what proportion of your sales come from sales allowances that you’ve given.
Examples of sales allowance scenarios
You can better understand sales allowances by using the following scenarios as examples:
Example 1
A customer purchases four bar stools from Home Decor USA, a company that sells home furnishings. After paying $100 for each stool, putting them together, and setting them on her kitchen counter, the customer notices that two of the bar stools sway.
When the client calls Home Decor USA to voice this concern, Home Decor USA offers a sales allowance of $20 for each uneven bar stool, for a total of $40. The client agrees because she wants to keep the bar stools. Home Decor USA handles this by returning the $40 to the customer’s original form of payment.
Example 2
A customer wants to buy five cans of black beans from Anderson Grocers, but they notice that the cans are severely dented. Because the customer still wants to buy the beans even though they are the last cans left on the shelf, an Anderson Grocers manager might give the customer a sales allowance.
The subsidy would make each can of black beans cheaper than $1. 03 to $0. 73, meaning the customer would owe $3. 65 ($0. 73 x 5) for their purchase instead of $5. 15 ($1. 03 x 5). The sales allowance is $1. 50 because it represents the price difference between the groceries’ original cost and their current price as a result of the price reduction.
Example 3
Paper Solutions Inc. , a company that sells paper products to large businesses, sends deposit slip paper to a bank with 20 branches for use in the lobby. However, the deposit slips that Paper Solutions sends don’t adhere to the agreement’s exact requirements.
Paper Solutions Inc. can offer the bank account credit if the bank agrees to retain the incorrect deposit slips Paper Solutions might grant the bank a $250 account credit in place of the $1,000 order fee, which would be equal to the sales allowance amount recorded in the business’s financial records.
FAQ
What is the difference between sales return and sales allowance?
Sales returns and allowances are terms for when a customer returns an item to a seller for a partial or full refund. A customer receives an allowance as a retroactive discount when they notify a business about a small but noticeable flaw in a product.
Is sales allowance an asset?
Sales Allowance and Returns: In accounting, despite representing losses, discounts, allowances, and returns are all contra accounts and part of asset accounts.
Are sales allowances an expense?
Definition of Sales Discounts Sales discounts are subtracted from gross sales, along with sales returns and allowances, to determine the company’s net sales. Consequently, Sales Discounts in the general ledger is a contra revenue account. Sales discounts are not reported as an expense.
Is sales allowance a debit or credit?
a discount given to a customer who bought goods but discovered a pricing error or another issue that didn’t require returning the goods A sales allowance will result in a debit to Sales Allowances and a credit to Accounts Receivable if the customer made a credit purchase.
