Q. Illustrating the recording of sales returns?

Following are two instances illustrating the recording of sales returns in the Sales Returns and Allowances account

- Suppose that a customer returns USD 300 of goods sold on account. If payment hasn't yet been received the required entry is

- Suppose that the customer has previously paid the account and the seller gives the customer a cash refund. Now the credit is to Cash rather than to Accounts Receivable. If the customer has occupied a 2 percent discount when paying the account the company would return to the customer the sales price less the sales discount amount. For instance if a customer returns goods that sold for USD 300 on which a 2 percent discount was taken the following entry would be made

The debit to the Allowances and Sales Returns account is for the full selling price of the purchase. The credit of USD 6 decreases the balance of the Sales Discounts account.

Next we exemplify the recording of a sales allowance in the Allowances and Sales Returns account. Suppose that a company grants a USD 400 allowance to a customer for damage resulting from improperly packed merchandise. If the customer hasn't yet paid the account the required entry would be

If the customer has previously paid the account the credit is to Cash instead of Accounts Receivable. If the customer take a 2 percent discount when paying the account the company would refund merely the net amount (USD 392). The Sales Discounts would be credited for USD8 and The entry would be

It demonstrates how a company could report sales discounts, sales and sales returns and allowances in the income statement. More frequently the income statement in a company's annual report begins with Net sales for the reason that sales details aren't important to external financial statement users.