Are sales returns and allowances an expense?
Sales returns and allowances are not considered an expense. Instead, they are a reduction of revenue.
The concept of sales returns and allowances comes into play when customers return goods for a refund or receive an allowance for damaged goods. These returns or allowances are considered contra-revenue accounts that reduce the original sales revenue.
A contra-revenue account is an account that naturally has a debit balance as opposed to a revenue account’s normal credit balance. It is used to reduce the total revenue the business reported.
When a sale is made, the company books the sale to the Sales Revenue account. When there is a return or allowance, it’s recorded in the Sales Returns and Allowances account. At the end of the period, the amount in this account is deducted from Sales Revenue to arrive at the Net Sales Revenue figure.
It’s important to note that while they reduce the company’s net revenue, sales returns and allowances are not an expense because they do not relate to the operating activities of the business. Rather, they relate to sales transactions with customers. The company’s cost related to these returns would be reflected in the cost of goods sold, or potentially in other operating expenses, depending on the nature of the costs.
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