Sales Allowance
A “sales allowance” refers to a reduction in the selling price of products or services, provided by the seller to the buyer, due to minor defects or deficiencies in the delivered items. It differs from a sales return in that the customer keeps the defective or deficient item, but receives a partial refund or credit as compensation. Sales allowances are considered a contra-revenue account, meaning they reduce the total gross sales amount to arrive at net sales.
Sales allowances can arise for several reasons, such as:
- Minor Defects: If a product has a minor defect that doesn’t significantly impair its functionality or appeal, but still diminishes its value.
- Quality Issues: When the delivered product doesn’t exactly match the quality that was promised or expected.
- Incomplete Orders: If part of a shipment is missing but the customer decides to keep what was received rather than returning the entire order.
- Late Deliveries: In some cases, if a shipment arrives later than promised, a seller might offer an allowance as compensation.
Example of Sales Allowance
“UrbanStyles” sold a designer leather jacket to a customer for $500. When the jacket arrived, the customer noticed that one of the buttons was slightly discolored. The customer loved the jacket’s fit and design, and replacing it might lead to waiting for another shipment. So, they decided to keep it but communicated their disappointment to “UrbanStyles.”
UrbanStyles,” aiming to maintain a positive relationship with the customer, decided to offer a sales allowance.
Solution:
The store offered the customer a $50 reduction in price due to the discolored button. The customer accepted the offer, and “UrbanStyles” either refunded them $50 or provided store credit for future use.
Accounting Treatment:
In the books of “UrbanStyles”:
- Sales: A credit (increase) of $500 would be recorded to the Sales account to account for the original sale of the jacket.
- Sales Allowances : A debit (increase) of would be recorded to the Sales Allowances account, reflecting the compensation given to the customer for the minor defect.
- Net Sales: As a result, the net sales revenue from this transaction would be represented as $450 ($500 – $50).
This example demonstrates how sales allowances work in a real-world scenario. They help businesses address minor issues without having to process a full return, and they ensure that customers feel valued and fairly treated, even if the product or service doesn’t meet their expectations fully.
