Sales returns and allowances is a line item appearing in the income statement. When this amount is large in proportion to total sales, it indicates that a business is having trouble shipping high-quality goods to its customers.
The sales returns and allowances line item is presented as a subtraction from the gross sales line item, and is intended to reduce sales by the amount of product returns from customers and sales allowances granted. It is followed in the income statement by a net sales line item, which is a calculation that adds together the gross sales line item and the negative amount in the sales returns and allowances line item.
This line item is the aggregation of two general ledger accounts, which are the sales returns account and the sales allowances account. Both of these accounts are contra accounts, which means that they offset gross sales. The natural balance in these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account.
The two accounts may sometimes be combined into a single account in the general ledger. This typically happens when the balances in these accounts are relatively small, so there is no point in tracking returns and allowances separately.