Working on a problem in which I've already sold a certain amount of pool tables and ping pong tables on account. The customer receives the items and notices a pool table is slightly damaged. I grant them an allowance at a list price of $500 and they keep the pool table.

Originally, I debited Sales on Account and credited Cash, also debited Inventory and credited Cost of Goods Sold.

I'm confused on what to do with the damaged inventory entry though, here are the options I could think of:

Option 1
Dr Cost of Goods Sold
Cr Cash

Option 2
Dr Inventory
Cr Accounts Recievable

Or should there be two entries? I'm just confused because nothing seems to be adding up. Help is much appreciated!

If you have refunded the amount of $500 to the customer, then you should:
Debit Sales returns and allowances
Credit Cash

If not yet paid credit accounts payable instead of cash. Debit entry will be the same

Thanks so much for your help! The entry you described makes sense, my only problem is that my teacher gives a list of accounts that will be used in these journal entries, and there is no account listed that looks like sales returns and allowances. The only account close to that is Allowance for Doubtful Accounts, but I know it shouldn't go there. Could it be Debit Unearned Revenue? That's the only other account I can think of that may fit.

Interesting. The really proper way to do is exactly what he said: Sales Returns & Allowances. This is a contra revenue account which offsets the Sales account. Sales is a credit and the R&A is a debit, which reduces the sales. (We show that reduction, along with the reduction from discounts, on the income statement.)

However, it doesn't have to be done that way -- it's just a good way to do it so that you can keep track of it more easily and also see it show up on your income statement. Since the overall effect is to reduce sales, and since you don't have such an account available, seems like you'd just have to reduce sales for it. Unless you have a special loss account for it or something.

It is not in any way related to the allowance for doubtful accounts or unearned revenue. It doesn't "fit" those at all, no. If you have the allowance account, then I assume you've studied that subject? That's related to what accounts you think will not be collectible, because someone just can't or won't pay, and not because you have given them some kind of credit. (There's a difference. Damaged merchandise isn't bad debt.) And it's certainly not unearned revenues, since this was from a sale that is earned. The unearned account is when someone paid you in advance. That's an account you should already know also.

Whatever it's called, it's either got to be a reduction of revenue, or a loss of some sort. There is no other choice.

First of all, if customer kept the inventory than there is no need for:

Dr - Salvage Good (inventory that could be sold for its salvage Amt) or
Damaged goods $500
Cr - A/R (if on credit) or Cash $500

In this case, you only need to:

Dr - Sales $500
Cr - A/R or Cash $500

Also, remember that the sale journal was previously recorded and the net effect on the income statement is $500 as described above.

Hope this helps.

rgarc029, the thread is several months old.