Net Sales:Sales Allowances

Brian Krogol
Was this helpful?
Alright so now let's discuss the sales allowance. I want to distinguish a sales allowance first from a sales return and as well from a sales discount. Okay All of these things are things that lower our revenue so the sales return. This is where the customer was unsatisfied and they return the product right? So we actually got the product back into our inventory with a sales allowance. We're still dealing with an unsatisfied customer. But they're gonna keep the product, they just want a lower price. So instead of paying the full price they want to discount maybe because the quality wasn't so good or whatever they want some lower price. Okay that's the sales allowance. Lastly we have those sales discounts and this is where we offer the customer a discount for paying us quickly. Okay so that's the difference this customers not unhappy with a sales discount, they're just paying us quicker so they pay a little less. Okay so let's dive into the sales allowance. So remember here this is where the customer is gonna keep the goods but the company lowers the price. So things on shelves sold 500 things on account at $12 per thing. When low quality things arrived the customer agreed to keep each thing at a price of $9 for this order. So notice they were unsatisfied but they're gonna keep them at a lower price. Okay so were originally when we first sold the things when we first sold them we're gonna make an entry. Something like this. Right? We have our accounts receivable, we're expecting to be owed $6,000. So we're going to debit Accounts receivable right to create the asset and then we're going to credit our revenue for 6000. Right? We sold these things we thought we were gonna get 6000 and that's 6000. Sorry it's the same as above when we were doing the other it was the 500 things times the $12 per thing gives us the 6000. Okay? But after it got to the warehouse the warehouse manager they're inspected everything and said you know what we don't like the quality here we need a lower price. Okay. So what is the amount of the lower price? $9. So what I want to think about is the amount of the discount it went from $12 to $9. So there was a $3 discount that they got. Right So for 500 units they got a $3 discount. Right and this is the discount amount and it's going to be 500 times three is 1500. But this remember this isn't like a sales discount for quick payment. This is a sales allowance for selling something low quality or something like that. So this is gonna be the amount of the allowance right here. Is the amount that they're paying less. Okay so they're paying us $1,500 less. That's the allowance. So how much cash are we gonna receive? So instead of paying a 6000 they're paying us 1500 less. So that comes out to 4500. Right? That's the cash that we're actually going to receive from the customer. Okay, So let's go ahead and make our journal entry first. We're gonna have cash, right? We're gonna debit cash. I'm gonna do it over here debit cash 4500, Right? Because that's the amount of cash or physically gonna pay us at that $9 price. Then the 1500 allowance. This is going to be a debit as well. Sales allowance is going to be a debit because it's a contra revenue account. It's a it's a revenue account that decreases revenue. Right? The idea here our revenue, we thought we were gonna get $6000 right? But we ended up only getting 4500 in cash. So to account for that less revenue that we really got, we didn't really earn 6000 in revenue. We do this debit account for this 1500 where we're gonna keep all our sales allowances. This makes it easier at the end of the period to say, hey man, look at all these sales allowances. Clearly there's some sort of quality issue with our product, right? Something like that. We're going to get better information than if we were to just debit revenue directly and just have a lower revenue amount here, we're showing hey we think we should have earned sixth. But because of this sales allowance were only earning 4500. Okay so we're gonna debit cash debit, sales allowance. And then we're going to credit accounts receivable, right? Because we were owed this $6000 originally and now we're not owed 6000 anymore. Right? We they paid off that obligation with the 4500 And striking a deal to pay us less money. So we're going to get rid of that $6,000 receivable. And you can see that our entry is balanced there, right? Our debits equal our credits. And this was our original entry over here. Cool. So we've got two entries there. That is the sales allowance entry on the right. So what ended up happening? We had our A. R. There's gonna be quite a bit in here. But let's let's put it all in A. R. Went up by 6000 And then our cash went up by 4500. But then our A. R. Also went down by 6000 in the next entry. Right? We had our cash going up by 4500. But are they are down by 6000. So those washout, we're left with that cash going up 4500. Nothing with liabilities here. But on the equity side we had revenue we had revenue of 40 of 6000. Right 6000. And then our sales allowance is decreasing our revenue by 1500. And that gets us to that net 4500. So you can see that the assets went up by 4500, equity went up by 4500. It is uh balanced. So last thing on this video is this Net sales formula. Okay, so our net sales is where we take our sales revenue, that's the gross amount of sales like this, $6,000 that we're talking about above. And then we're gonna decrease it by all of these things. That might decrease it, right? The sales discounts that we saw, that's gonna decrease sales revenue as well as the sales returns and allowances are also going to decrease uh our our our net revenue, right? So if we take our gross amount, this is our gross amount of revenue. We subtract out some things like the discounts and the returns we get to a net amount of revenue. Cool. Alright, so that's about it here, let's go on to the next video.