Question

Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.

Answer 1

:==>> A sales allowance is a reduction in the price charged by a seller, due to a problem with the sold product or service, such as a quality problem, a short shipment, or an incorrect price. Thus, the sales allowance is created after the initial billing to the buyer, but before the buyer pays the seller. The sales allowance is recorded as a deduction from gross sales, and so is incorporated into the net sales figure in the income statement.

==>> EXAMPLE :--a company ships products that are slightly out of specification. The original billing was for $10,000, and the company convinces its customer to pay for the out-of-spec goods with a sales allowance of $1,000. The journal entry recorded by the company for the sales allowance is a debit of $1,000 to the sales allowance account and a credit to the accounts receivable account of $1,000.

==>> variable amount that is promised within a contract be included as a consideration. To this end, an entity should estimate the amount of the consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Variable consideration includes discounts, credits, rebates, performance bonus, penalties, sales returns, refunds, price concessions, incentives, etc.

:- they relate to the concept of variable consideration.

The transaction price is generally allocated using the relative standalone selling price method and an example of applying this method is available in Standalone Selling Prices. The standard includes two exceptions to the relative standalone selling price method: allocating variable consideration and allocating discounts.