During the year, sales returns and allowances totaled $55,000. The cost of the merchandise returned was $33,000

During the year, sales returns and allowances totaled $55,000. The cost of the merchandise returned was $33,000. The accountant recorded all the returns and allowances by debiting the sales account and crediting Cost of Merchandise Sold for $55,000.

Was the accountant’s method of recording returns acceptable? Explain. In your
explanation, include the advantages of using a sales returns and allowances account.


Answer:
It was acceptable to debit Sales for the $55,000. However, using Sales Returns and Allowances assists management in monitoring the amount of returns so that quick action can be taken if returns become excessive.

Accounts Receivable should also have been credited for $55,000. In addition, Cost of Merchandise Sold should only have been credited for the cost of the merchandise sold, not the selling price. Merchandise Inventory should also have been debited for the cost of the merchandise returned. The entries to correctly record the returns would have been as follows:


Sales (or Sales Returns and Allowances) 55,000
Accounts Receivable 55,000
Merchandise Inventory 33,000
Cost of Merchandise Sold 33,000