Chapter 9, Problem 1QY

Which of the following is true about the Sales Returns and Allowances account?

1. a. It is used to record the sale of merchandise.
2. b. It is used to record the reduction of inventory.
3. c. It is a contra account, deducted from sales.
4. d. It is used to record discounts for prompt payment.
5. e. None of the above.

To determine

State the option that provides true statement on the sales returns and allowance account.

Answer to Problem 1QY

c. It is a contra account, deducted from sales.

Explanation of Solution

Sales returns and allowances:

Sometimes, customers either return goods due to manufacturing defects, or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price, is referred to as sales returns and allowances. These are recorded as contra-revenue accounts.

Justification for the incorrect answer:

Option a, b, d and e:

Sales returns and allowance account records the return of goods due to the manufacturing defects, or accept to or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price. Hence, Option a, b, d and e are incorrect answer.

Justification for the correct answer:

Option c:

Sales returns and allowance account records the amount of goods returned, or reduced amount in sale price. It is treated as contra revenue account and they are deducted from the sales account (revenue).

Therefore, from the above explanation it is observed that Option c (It is a contra account, deducted form sales)  is the correct answer and other options a, b and d are incorrect answer.