Question

Sales returns and allowances A) Represent a reduction of the customer's account receivable B) Provide information about dissatisfied customers and the possibility of lost future sales C) Are omitted from published statements D) Are usually recorded in separate contra-revenue accounts E) All of the above

Answer 1

Answer:

The correct options are (B). Provide information about dissatisfied customers and the possibility of lost future sales and  (D). Are usually recorded in separate contra-revenue accounts.

From the foregoing the Account Receivable should be credited with the full amount of the original sales transactions not debited as provided in option "A." Represent a reduction of the customer's account receivable.

Explanation:

Sales Returns and Allowances is a contra-revenue account deducted from Sales. When customers return goods for one unsatisfied reason or the other, adjustments are made to the sales account. Likewise, deductions to the original selling price are made when the customer accepts defective products.

How to Record the Sales Return Transaction

The following under-listed steps are to be taken to make the appropriate entries:

• 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.