Question

Gold & Co. sold a defective product to a customer. Due to this, Gold agreed to a sales allowance. What impact does a sales allowance have on the balance sheet?

		Assets increase
		Equity decreases
		Assets stay the same
		Equity increases

Answer 1

Answer:

D) Equity Increases

Reason: When sales allowances are made they are reflected through the income statement and reduced from the gross sales portion, But however they do hava an impact on balance sheet indirectly either through increase in accounts receivable (Credit sale made) or cash (Cash sale) or it can be owners equity (Through net income arrived from p/l or income statements & hrough retained earnings) and also the assets and equity are reduced when they are paid out as dividends.

Reasons why other options are incorrect:

A) Assets increase : When sales allowances are made the accounts receivable account is credited and sales allowance is debited, leading to decrease in assets in balance sheet, Hence incorrect.

B) Equity Decreases: Equity decrease when the portion of sales allowance which form part of P/l or income statement which is considered in retained earnings calculation is paid out as dividend.

C) Assets stay the same: Assets do not stay the same as the accounts receivable ledger is decreasing due to sales allownce (Assumed credit sale made), So,technically assets shall decrease. Hence incorrect.

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