Returns and allowances are two distinct business financial transactions that get recorded on one line of a company income statement. "Returns" is the value of the merchandise customers bring back after purchase and "allowances" is the amount of discounts you give to dissatisfied customers.
Manufacturers and resellers often accept returned merchandise from dissatisfied customers. When you account for the revenue at the time of sale, you have to offset that amount when the item is returned. An allowance is a discount or refund often given to a business buyer when a shipment is delayed or other problems arise. If you sell goods for $10,000 and offer a $500 discount, you must account for this "allowance" as well.
Income Statement Accounting
Each itemized return and allowance gets recorded by your accounting system, just as your revenue is recorded after each sale. When you prepare monthly, quarterly and annual income statements, subtract total returns and allowances from top-line revenue to get to "net receipts." Then, subtract costs of goods sold to reveal gross profit for the period.
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