Sales returns and allowances

Definition

Sales returns and allowances refer to the process where customers return previously purchased goods or receive a reduction in their sales price due to defects or other issues. These transactions are recorded in contra-revenue accounts, reducing the total revenue reported by a company.

5 Must Know Facts For Your Next Test

1. Sales returns and allowances are recorded in contra-revenue accounts to offset gross sales.
2. They help companies accurately reflect net sales on financial statements.
3. High levels of sales returns and allowances may indicate product quality issues or customer dissatisfaction.
4. These transactions require proper documentation, such as credit memos, to validate the adjustments made to revenue.
5. Sales returns reduce inventory levels while sales allowances do not impact inventory but adjust the selling price.

Review Questions

Related terms

Gross Sales:

The total revenue generated from all sales transactions before any deductions.

Net Sales:

The amount of revenue remaining after deducting sales returns, allowances, and discounts from gross sales.

Credit Memo:

A document issued by a seller to acknowledge that goods have been returned or an allowance has been granted.