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Evaluate the practice of using a contra account to record sales returns and allowances.
In the sales revenue section of an income statement, the sales returns and allowances account is subtracted from sales because these accounts have the opposite effect on net income. [ Therefore, sales returns and allowances is considered a contra-revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra-revenue account allows management to monitor returns and allowances as a percentage of overall sales. High return levels may indicate the presence of serious but correctable problems. For example, improved packaging might minimize damage
during shipment, new suppliers might reduce the amount of defective merchandise, or better methods for recording and packaging orders might eliminate or reduce incorrect merchandise shipments. The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra-revenue account. ]
Expert answered|selymi|Points 9926|
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Asked 1/19/2013 11:30:21 AM
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