What Is a Sales Allowance? (Definition and Examples)

Any business that sells products to customers could make a mistake, from charging the customer the wrong price to sending defective products as separate of their order. It ‘s important to be able to make up for mistakes of this nature. One way to do that is with a sales allowance, which is an option that ‘s normally beneficial for both the customers and the party. In this article, we define sales allowance, explain the remainder between a sales valuation reserve and a sales return, share some accounting for sales allowances and provide examples you can use to understand the concept. Related: Understanding the Accounting Allowance Method

What is a sales allowance?

A sales valuation reserve is a price reduction that a seller initiates because of a problem with the buyer ‘s order. This can mean that the buyer received a bad merchandise, did n’t get part of their decree or paid the incorrect price for an item, along with many other scenarios that a seller decide. A sales allowance is what a seller offers a buyer as an option to the buyer returning the product. There are a couple of benefits to providing sales allowances to customers, including :

Better customer relationships

many customers value doing business with a company that tries to fix their mistakes. There are many times when situations are n’t going to be perfective, but it ‘s what a company does about it that can make a difference to the customers they serve. If you are designed with offering a monetary value reduction, this appears as a good faith effort on your behalf and can please the customer.

Less money spent

It can cost money to accept a return on an item because you typically have to attempt to resell it, spend money to fix the detail so it ‘s ready for purchase by person else or discard it and record the item as a larger loss.

Less time spent

If you have to process a sales return versus a sales valuation reserve, it can take more clock time. With a sales allowance, you may discount an item or issue money bet on to a customer, both of which rarely take a distribute of time for an employee to complete. however, a sales render may include arranging for merchandise pickup from the customer ‘s home or issuing a render label and instructing the customer to take the action to return the item themselves, both solutions that typically have more logistics involved than a sales allowance would.

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Ability to quality control

With proper accounting, you ‘ll keep records of any sales allowances, including the amount of the allowance and why you offered the allowance to your customer or seller. Over time, you can identify trends in your allowances, possibly establishing that your company has shipping issues or a bad contribution of your production process. You can besides identify which customers wanted to accept the sales allowance and which wanted to move forward with a return of the intersection. Related: 14 Bookkeeping Basics for Small Business Owners

Difference between a sales allowance and a sales return

The dispute between a sales allowance and a sales return is the details of the transaction. In both, the customer may be unhappy with the product they receive, but with a sales allowance, the customer agrees to accept the detail as-is in switch over for a monetary value decrease. In contrast, a sales return would mean that the customer is unhappy with the product they purchase and does not want to keep it. alternatively, they want to return the merchandise for a full return of their money binding. Related: Cost of Sales: A Definitive Guide (With Example)

Accounting for sales allowances

When you provide a sales allowance to a customer, you should list the transaction to maintain correct bookkeeping records. One of the beginning steps is making sure the fiscal records include a sales allowance account. This will help you identify where to place the sum of sales allowance for each customer who accepts the offer from your company. once you offer a sales allowance to the customer, you should record it correct away to prevent any supervision in your record keeping. How you record the details depends on how the customer purchases the product. normally, customers will either have an account with your company, which is distinctive in business-to-business ( B2B ) sales or will pay for their purchases through personal credit or cash, a common transaction type for business-to-consumer ( B2C ) companies. No matter which way you receive payment from your customer, you ‘ll record the reduction in monetary value as a debit under the “ sales returns and allowances ” account credit line. If the customer or seller has an account that they use to purchase goods with, and used that account to buy the product you ‘re providing a sales allowance for, you would besides record your sales allowance come as a credit under your “ accounts receivable ” account line. For any customer who purchases the merchandise using cash, the sales allowance sum may besides appear as a accredit on the “ cash ” line in your fiscal records. Your sales allowances account is called a contra-revenue report and you ‘ll record the sum in this report at the end of a coverage period on your income statement. You would late deduct these figures from your gross gross of sales because sales allowances affect the company ‘s net income. You ‘ll besides be better able to see which percentage of your sales are sales allowances that you have provided.

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Examples of sales allowance scenarios

These examples of sales allowance scenarios can help you understand sales allowances more :

Example 1

Home Decor USA, a company that sells items to furnish homes, sells a four-pack of barroom stools to a customer. The customer, after paying $ 100 per stool, assembling them and placing them at her kitchen countertop, discovers that two of the bar stools careen. The customer calls Home Decor USA to let them know of this issue and Home Decor USA then offers a sales allowance of $ 20 per prevention stool that ‘s spotty for a sum of $ 40. Because the customer wants to keep the barroom stools, she accepts. To process this, Home Decor USA refunds its customer for the $ 40 using the original method of payment. Related: 9 Ways To Provide Excellent Customer Service

Example 2

A customer is shopping at Anderson Grocers and wants to purchase five cans of black beans, but they realize the cans are significantly dented. The customer still wants to purchase the beans because they were the last cans on the shelf, so a director at Anderson Grocers may provide a sales allowance to the customer. The allowance would decrease the price of each can of black beans from $ 1.03 to $ 0.73, meaning the customer would owe $ 3.65 ( $ 0.73 x 5 ) for their purchase alternatively of $ 5.15 ( $ 1.03 x 5 ). The sales allowance is $ 1.50 because it ‘s the difference between what the cost of the groceries would have been and what they now are because of the price reduction.

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Example 3

Paper Solutions Inc., a company that sells paper products to enterprise-level businesses, ships deposit dislocate newspaper to a large deposit for consumption in the anteroom of 20 different branches. however, the down payment slips Paper Solutions sends do n’t meet the claim specifications outlined in the agreement. Paper Solutions Inc. can offer account credit to the bank, provided that the bank is all right with keeping the faulty depository slips. alternatively of charging the bank $ 1,000 for the order, Paper Solutions may give them a $ 250 history credit, which would be the same amount of the sales allowance figure in the caller ‘s fiscal records .