sales returns and allowances is a contra-revenue account

Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. Record the following transactions in the sales journal and sales returns and allowances journal, and post to the ledger accounts. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.

Are the Accounts Receivable Current or Non-assets?

Sales allowances refer to a situation whereby a customer is allowed to keep the product without paying for it or without paying the full amount owed for the entire purchase price. As it is with sales returns, there are varieties of reasons why a business gives sales allowances to customers. These reasons as stated under sales returns are defective products, the customer changing their minds, product damage, etc. Although a customer may want to return goods to its seller for a large variety of reasons.

Contra revenue accounts help in presenting the net revenue, which is the revenue earned by the company after accounting for any returns, allowances, and discounts. Both sales returns and allowances represent a reduction in a company’s revenues after it makes sales. The accruals concept requires companies to account for revenues when they occur. Therefore, companies must not treat these transactions on cash settlement. Instead, they must record it as soon as the transaction happens.

Accumulated Depreciation on Balance Sheet

Usually, companies record sales in the books when they deliver goods to customers. In short, a sales allowance does not involve a physical return of goods. Instead, companies allow a specific deduction from the original price agreed with customers. contra revenue account These features differentiate sales allowances from sales returns. However, it still affects a company’s revenues in its financial statements. It can be tricky when it comes to accounting for sales returns and allowances but no worries.

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. If Music World returns merchandise worth say $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return. If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return.

Contra Liability Account

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Sales or revenues is a credit account due to its nature of being an income or increase in equity.

In each case, the buyer is still allowed by the business or seller to keep the product and they are not required to pay for the product or continue paying for it. In other words, the buyer does not send the merchandise back to the seller but receives a reduction or discount in the total amount that has to be paid to the seller for the order. When only “Net Sales” is presented in the income statement, its computation is shown in notes to financial statements.

Understanding Sales Returns and Allowances Journal Entries

For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. Therefore, when sales returns and allowances occur, companies have already recorded sales in the accounts. The accounting treatment of sales returns and allowances occurs after this period. Therefore, companies must account for them as a reduction in sales rather than credit the account with the amount.

If the customer has yet to pay for the initial purchase, credit accounts receivable instead. A credit reduces these accounts, which are assets, on the balance sheet. Whatever the case it is, the aim at which the customer returns the good is to receive a refund.

What is a Depreciation Tax Shield?

Learn more about how Pressbooks supports open publishing practices. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. The original memo is sent to the customer and the duplicate copy is retained. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on Your responsibilities depend on how the original purchase was made and how you plan on reimbursing the customer.

What accounts are contra revenue accounts?

Contra Revenue Account

The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company's revenue.

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