Chapter 7
Inventory: Merchandising Transactions
182
There is a $4,000 increase in the sales returns and allowances account. This amount decreases
revenue since the contra-revenue account has the opposite effect than the revenue account.
In the example in Figure 7.15, the inventory that was returned was not what the customer wanted.
There was nothing wrong with the product in terms of quality, so it was placed back on the shelf
to be sold again. If the items returned by the customer were damaged, then the inventory cannot
be sold again. In that case, Tools 4U would not record the second journal entry from Figure 7.15
because the damaged inventory is worthless.
Sales Allowances
There are circumstances where a reduction to the original selling price is given to a customer.
Assume the customer from January 15 discovered that some goods were damaged during
shipping. Instead of returning the items, the customer agreed to accept an allowance of 5% on
the price of the goods it kept.The customer kept $11,000 ($15,000 original sale − $4,000 return)
of goods, so it will get a $550 ($11,000 × 5%) reduction on what it owes Tools 4U.
The journal entry is shown in Figure 7.16.
The amount is recorded as a debit to sales
returns and allowances and a credit to
accounts receivable.The transaction decreases
equity by $550.
A balance of $10,450 ($15,000 − $4,000 −
$550) is still owed by Tools 4U’s customer.
Sales Discounts
When selling products or services, it is common to offer sales discounts to customers for early
payment. The concept works in the same way as the purchase discount. Assume that Tools 4U
offered its customer from January 15 terms of 2/10, n/30 in the invoice. If the customer pays by
January 25, a 2% discount will be applied on the amount owing of $10,450.
Assume the customer made the payment on January 20; the amount is $10,241 ($10,450 less the
2% discount).The journal entry to record this transaction is shown in Figure 7.17.
Owner’s equity decreases by $550
SALES RETURNS & ALLOWANCES
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
OPERATING INCOME (LOSS)
CURRENT ASSETS
CASH
INVENTORY
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
ACCOUNTS
RECEIVABLE
LONG-TERM
ASSETS
ACCOUNTS
PAYABLE
BANK LOAN
OWNER’S EQUITY
CURRENT LIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
– $550 CR
+ $550 DR
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
Journal
Page 1
date
2016
account title and explanation debit Credit
Jan 18 Sales Returns & Allowances
550
Accounts Receivable
550
Sale allowance for damaged
goods
______________
fIGuRe 7.16
