Sales returns is what type of account

Sales Returns and Allowances is a contra-revenue account deducted from Sales. It is a sales adjustments account that represents merchandise returns from customers, and deductions to the original selling price when the customer accepts defective products.

It is deducted from "Sales" or "Gross Sales" in the income statement. Sales returns refer to actual returns of goods from customers because defective or wrong products were delivered. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. Here's an example:. When only "Net Sales" is presented in the income statement, its computation is shown in notes to financial statements. For example, you may specify on the sales receipt that you allow returns within 10 days of purchase and only with the original receipt.

You may exclude certain items, such as reduced-price items and perishable goods. Debit sales returns and allowances by the selling price. Debit the appropriate tax liability account by the taxes collected on the original sale.

Credit cash or accounts receivable by the full amount of the original sales transaction. This accounts for your tax liability and ensures the customer receives the full return. It essentially voids the transaction and brings your books back to a zero against the entire transaction. Sales allowances are reductions in the original selling price for defective products that customers agree to keep.

A few days later she returned goods to the extent of 48, The net result of these transactions would be a net sale of 17, to Ms. This can be reflected in our account books by recording the first transaction of a credit sale and then recording a reverse transaction at the time of goods being returned.

For a transaction of purchase we would have to incur costs like administration cost for placing the order, cost for carrying in the goods, etc. For a transaction of sale we would have to incur costs like administration cost for processing the order, cost for packing the goods, cost for delivering the goods etc.

When the goods are returned these charges which have been expended at the time of the original transaction may go waste. Additional transaction costs like transportation cost, packing cost for returning the goods etc.

Whoever bears the additional cost, it surely is a waste as it benefits neither of the parties to the transaction. It would be impractical to think of in terms of eliminating the possibility of such transaction. Their occurrence is natural and acceptable. What we look at is to reduce the possibility of returns. The seller records this return as a debit to a Sales Returns account and a credit to the Accounts Receivable account; the total amount of sales returns in this account is a deduction from the reported amount of gross sales in a period, which yields a net sales figure.

The credit to the Accounts Receivable account reduces the amount of accounts receivable outstanding. The Sales Returns account is a contra account. It is possible that a sales return will not be authorized until a later period than the one in which the original sale transaction was completed. If so, there will be an excessive amount of revenue recognized in the original reporting period , with the offsetting sales reduction appearing in a later reporting period.

This overstates profits in the first period and understates profits in the later period.