A

Sales returns and allowances is a contra-revenue account deducted from sales. The relation between total sales and the amount of sales returns and allowances indicates how well a business ships high-quality products to its clients.

Explanation:

Sales returns occur if a customer decides to return the goods to the seller for compensation, such as a refund or a credit. Sales allowance takes place when a customer chooses to accept the goods but at a reduced price. Returns happen due to various reasons, most commonly due to the product damage or law quality of a good. Usually, sales returns and allowances are recorded in the company’s general ledger in a single account of the same name. However, there are two common approaches to how to record transactions that involve sales returns and allowances. Firstly, they might be recorded in the general journal of a company if the balances in these accounts are small. According to the second approach, such transactions are recorded in a special journal, which is more convenient for a company that is experiencing many sales returns throughout a year. Also, some companies prefer not to keep the sales returns and allowances account debiting “sales” directly. The sales returns and allowances account affects journal entries in other accounts as well, such as cash and accounts receivable, accounts payable, and cost of goods sold.

Returns are a normal part of any business; however, having many returns may have an adverse effect on a business. The total amount of returns and allowances and its percentage may be used for diagnostic purposes.