Retailers commonly mail or fax written purchase orders to buy merchandise from wholesalers. The wholesaler typically make sales on account, and credit approval is needed. A sales invoice is generated. One copy is sent to the retailer as a bill for the merchandise, one copy is sent to accounting to record the sale, and one copy is shipped with the merchandise. Both retailers and wholesalers sometimes have customers return goods or seek price reductions for damaged goods.
Merchandise returned by a customer for a refund is called a sales return.
Price reductions granted by the seller because of defects or other problems with the merchandise are called sales allowances. When credit is given for merchandise returned or for an allowance, a credit memo is issued for the amount involved. To account for merchandise sales transactions, four new accounts will be used. The sales account is a revenue account used to record sales of merchandise. The account is credited for the selling price of merchandise sold during the period.