On some occasions you might find it good business practice to accept the return of an item that you sold and then issue the customer a refund. Maybe you made an internet sale of wearable art and the customer just didn’t like the way it fitted. Maybe the item was lost or damaged in the mail and you need to refund the purchase price (hopefully you purchased shipping insurance). A sales allowance occurs when the customer agrees to keep and pay for an item while you offer a reduction in the price. The reduction amount is the allowance.
The sales returns and allowances account is a contra account to the sales account. A contra account has a normal balance opposite of what is usual. The sales account carries a credit balance and the sales returns and allowances account carries a debit balance. Usually the two accounts will be subtotaled to Net Sales. On the income statement it will look like this:
Sales returns and allowances 50
Net sales $2,450
Let’s say you sold an art-to-wear necklace for $175 that you accepted for return because it was too short for the customer’s heavy-set neck.
Journal entry recording the sale:
Record the return:
Sales returns and allowances $175
Refund for return of necklace
Maybe the customer is willing to take the necklace to a jeweler to have an extension put on it and you agree to offer a discount. The journal entry to record the sale would be the same as above.
To record the discount:
Sales returns and allowances $25
Discount given on necklace purchase
It’s good accounting to keep a separate account for return and refund amounts. You will have a record of total sales and be able to monitor and identify if there are problems occurring.