Sales Returns and Allowances

A company needs to recognize that customers will return a certain amount of sold merchandise, or the company may grant an allowance on the sales price if the customer is dissatisfied. Estimated returns and allowances are recognized as sales are made.

Two valuation accounts are used: sales returns and allowances and allowance for sales returns and allowances.

• Sales returns and allowances is a contra-revenue account. It carries a debit balance and reduces sales revenue on the income statement.
• Allowance for sales returns and allowances is a contra-asset account. It carries a credit balance and reduces accounts receivable on the balance sheet.

The sales returns and allowances account and the allowance for sales returns and allowances account are used to show the estimated amount of refunds and allowances the company expects to grant in the future. Both sales revenue and accounts receivable are reduced to the amount the company expects to receive.