A:

Whenever a company has a product returned by a customer and is forced to reimburse the proceeds from the sale, that event must be recorded in the sales returns and allowances account. In accounting terms, this has ramifications for both sales figures and cost of goods sold figures, which are crucial to the calculation of a company's gross profit.

What Is Gross Profit?

Gross profit – an accounting term representing the difference between revenue and the cost of goods sold -- is an important line item on an income statement for financial analysts and investors when they evaluate a firm's production process.

Recording a Sales Return

After a product is returned, the company records the refund into its allowances account, which reduces sales figures (revenue minus sales returns and allowances equals net sales). On top of that, the company subtracts the original cost of the item from the cost of goods sold account.

This means that a sales return does have an impact on gross profit and gross profit margin. Since the impact on sales is not equivalent to the impact on cost of goods sold (for instance, a $10 return might only decrease cost of goods sold by $6), it is not immediately clear whether a return negatively or positively impacts gross profit margin.

Even if sales returns result in a net gain for gross margin, this does not necessarily mean that sales returns are a positive factor; after all, customers usually only return products if they are dissatisfied.

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