What is the normal balance of the Sales Returns and Allowances account?

Employees who are responsible for their entity’s accounting activities will see a file such as the one below on more of a day-to-day basis. This general ledger example shows a journal entry being made for the payment (cash) of postage (expense) within the Academic Support responsibility center (RC). By having many revenue accounts and a huge number of expense accounts, a company will be able to report detailed information on revenues and expenses throughout the year. The reasoning behind this rule is that revenues increase retained earnings, and increases in retained earnings are recorded on the right side. Expenses decrease retained earnings, and decreases in retained earnings are recorded on the left side. For example, a company’s checking account (an asset) has a credit balance if the account is overdrawn.

When sales are returned by customers or an allowance is granted to them due to delayed delivery, breakage, or quality issues, an entry is made in the sales returns and allowances journal. A normal balance is the side of the T-account where the balance is normally found. When an amount is accounted for on its normal balance side, it increases that account. On the contrary, when an amount is accounted for on the opposite side of its normal balance, it decreases that amount. Understand these critical pieces of notation by exploring the definitions and purposes of debits and credits and how they help form the basics of double-entry accounting. When merchandise is returned by a customer or an allowance is granted, a credit memorandum (also known as a credit memo) is prepared.

General Rules for Debits and Credits

Debits and credits differ in accounting in comparison to what bank users most commonly see. For example, when making a transaction at a bank, a user depositing a $100 check would be crediting, or increasing, the balance in the account. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited.

As we can see from this expanded accounting equation, Assets accounts increase on the debit side and decrease on the credit side. Liabilities increase on the credit side and decrease on the debit side. This becomes easier to understand as you become familiar with the normal balance of an account. In the seller’s books, a return or allowance is recorded as a reduction in sales revenue. Since the sales account normally has a credit balance, returns and allowances could be recorded on the debit side (the reduction side) of the sales account. If a cash refund is made due to a sales return or allowance, the sales returns and allowances account is debited and the cash account is credited.

Translate the Adjusted Trial Balance to Financial Statements

For someone learning about accounting, understanding debits and credits can be confusing. The easiest way to remember them is that debits are on the left and credits are on the right. This means debits increase the left side of the balance sheet and accounting equation, while credits increase the right side. Here are some examples of common journal entries along with their debits and credits. I’ve also added a column that shows the effect that each line of the journal entry has on the balance sheet.

We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. A return occurs when a buyer returns part or all of the merchandise they purchased back to the seller. An allowance occurs when a buyer decides to keep damaged or defective goods but https://kelleysbookkeeping.com/9-tips-for-small-business-taxes/ at a reduction from the original price. Return of merchandise sold for cash is entered in the cash payments journal or cash book. Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as a T-account.

The Accounting Definition

In essence, the debit increases one of the asset accounts, while the credit increases shareholders’ equity. These offsetting entries are explained by the accounting equation, where assets must equal liabilities plus equity. The normal balance is the expected balance each account type maintains, which is the side that increases. As assets and expenses increase on the debit side, their normal balance is a debit. Dividends paid to shareholders also have a normal balance that is a debit entry. Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” balance is a credit.

Let’s say there were a credit of $4,000 and a debit of $6,000 in the Accounts Payable account. Since Accounts Payable increases on the credit side, one would expect a normal balance on the credit side. However, the difference between the two figures in this case would be a debit balance of $2,000, which is an abnormal balance. This situation could possibly occur with an overpayment to a supplier or an error in recording. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation. To show how the debit and credit process works within IU’s general ledger, the following image was pulled from the IUIE database.

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. The company purchases equipment for $10,000 with $2,000 cash and an $8,000 loan.

Since expenses are usually increasing, think “debit” when expenses are incurred. To better visualize debits and credits in various financial statement line items, T-Accounts are commonly used. Debits are presented on the left-hand side of the T-account, whereas credits are presented on the right. Included below are the main financial statement line items presented as T-accounts, showing their normal balances. A contra-revenue account is a liability from revenue which helps in determining whether to omit certain sales transactions, which would otherwise be mistaken as revenue.

Record a Customer Payment on a Previous Credit Sale

It is usually included if there are any sales returns and allowances or other type of return not recorded in the sales journal. The side that increases (debit or credit) is referred to as an account’s Normal Balance For Sales normal balance. Here is another summary chart of each account type and the normal balances. Within IU’s KFS, debits and credits can sometimes be referred to as “to” and “from” accounts.

• For example, a company’s checking account (an asset) has a credit balance if the account is overdrawn.
• This situation could possibly occur with an overpayment to a supplier or an error in recording.
• The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts—these accounts have debit balances because they are reductions to sales.
• Any commercial activity in which a business organization involves the primary motive of earning profits from the proceeds of the activity is known as business activities.

This transaction will require a journal entry that includes an expense account and a cash account. Note, for this example, an automatic off-set entry will be posted to cash and IU users are not able to post directly to any of the cash object codes. Because postage was purchased for $12.70, cash, an asset account, will be credited, which will decrease the cash balance by $12.70. Contrarily, purchasing postage is an expense, and therefore will be debited, which will increase the expense balance by $12.70. When the account balances are summed, the debits equal the credits, ensuring that the Academic Support RC has accounted for this transaction correctly. An account’s assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases.

Assets = Liabilities + Owner’s Equity + Revenue – Expenses

Since assets are on the left side of the equation, an asset account increases with a debit entry and decreases with a credit entry. Conversely, liabilities are on the right side of the equation, so they are increased by credits and decreased by debits. The same is true for owners’ equity, but it contains net income that needs a little more explanation, which we’ll do in the next section. Owners’ equity accounts represent an owner’s investment in the company and consist of capital contributed to the company and earnings retained by the company. Sales are recorded as a credit because the offsetting side of the journal entry is a debit – usually to either the cash or accounts receivable account.