In the context of net sales, if Nelson must make a \$75 payment each month to cover customer returns, what does this payment most likely represent?

• A. Accounts receivable
• B. Sales returns and allowances
• C. Gross sales revenue
• D. Cost of goods sold

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'Sales Returns and Allowances': This account is used to record the value of goods returned by customers or allowances granted to them for defective or unsatisfactory goods. It is a contra-revenue account, meaning it reduces the total sales revenue.
2. Analyze the problem: Nelson is making a \$75 payment each month to cover customer returns. This indicates that the payment is related to the returns or allowances provided to customers for goods sold.
3. Eliminate unrelated options: 'Accounts receivable' refers to amounts owed by customers for credit sales, which is not directly related to customer returns. 'Gross sales revenue' represents the total sales before any deductions, and 'Cost of goods sold' refers to the cost of producing or purchasing the goods sold, neither of which aligns with the context of customer returns.
4. Identify the correct option: Since the payment is directly tied to customer returns, it most likely represents 'Sales Returns and Allowances,' which is the correct answer.
5. Conclude: The \$75 payment is recorded under 'Sales Returns and Allowances,' reducing the net sales revenue to reflect the impact of customer returns or allowances.