Sales Returns and Allowances
The financial accounting term sales returns and allowances is used to describe the value of unsatisfactory merchandise returned by customers or refunds issued by the company to customers. Sales returns and allowances is found on a company’s income statement.
Most companies allow consumers to return a product if it is found to be defective. Oftentimes a customer may agree to keep a defective product if a partial refund is applied to the price paid. This is referred to as an allowance. Alternatively, a customer may decide to return an unsatisfactory product.
Such allowances and returns are reported on the company’s income statement, thereby reducing revenues. These returns also lower accounts receivable (credit sales) and / or cash on the company’s balance sheet. The company’s management team is interested in knowing the value of sales returns and allowances since it not only measures customer satisfaction but also serves as a quality control metric.