Which of the following best describes the Allowance for Sales Discounts account in relation to net sales?

• A. It is an asset account that represents expected future sales.
• B. It is an expense account that increases net sales.
• C. It is a contra-revenue account that reduces gross sales to arrive at net sales.
• D. It is a liability account that records amounts owed to customers.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'Allowance for Sales Discounts': This account is used to estimate the amount of sales discounts that will be taken by customers in the future. It is not an asset, expense, or liability account, but rather a contra-revenue account.
2. Define 'contra-revenue account': A contra-revenue account is an account that reduces the total revenue reported on the income statement. It is used to adjust gross sales to arrive at net sales.
3. Analyze the relationship between gross sales and net sales: Gross sales represent the total sales before any deductions, while net sales are calculated by subtracting sales discounts, returns, and allowances from gross sales.
4. Identify the role of the Allowance for Sales Discounts: This account reduces gross sales by the estimated amount of discounts customers are expected to take, thereby contributing to the calculation of net sales.
5. Confirm the correct description: Based on the above analysis, the Allowance for Sales Discounts is best described as a contra-revenue account that reduces gross sales to arrive at net sales.