USA Bad Debt or Sales Allowance


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If a customer claims they didn't receive all of the products they ordered (even though we are sure we delivered it), and they deduct the amount from payment remittance, should we (the seller) record the deduction as a bad debt expense or as a sales allowance?
 
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Steve-LevelUp

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If all of your records indicate they received the product and the customer refuses to pay for that product, then it is a bad debt. I understand why you would want to record it as a sales allowance, but I think that using that would be misleading as anyone asking for the total sales discounts, it would include the above, which wasn't really a sales discount.
 
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Thank you for the feedback Steve-LevelUp. I posted the question on this forum because, my thinking was exactly as yours, but I am Not a CPA, and our company's CPA has the opposite opinion - the receivable is not valid since we cannot prove (to the customer's satisfaction at least) that the products were delivered; so I just wondered if there was varying opinions among other professional accountants. Either way thefrustrating, net result of these unauthorized deductions is the same = reduced profits!
 

Fidget

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In the absence of good evidence - usually in the form of a signature acknowledging the receipt of the goods (whether or not the person signing for them actually checks that all items are there), then you can't really treat the customer as a bad debtor - basically because you can't prove it.

I'd be more inclined to write the value of the missing items off inventory and obviously put controls in place to reduce the risk of that happening.

The point between loading and delivery is ripe for error and pilferage, so ideally there should be paperwork agreeing what's been loaded for delivery, and then a signature from the recipient acknowledging the delivery.
 
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Thanks Fidget. I certainly understand the point between loading and delivery is ripe for error & pilferage, but most of the time we are shipping collect using the customer dictated carrier. The customer's receiving process can also be ripe for error. So when we have multiple check points to ensure the count going on the truck is correct, and the truck is their carrier, it still seems a little more like a bad debt write off than an allowance, but I am with you in that we cannot & should not treat the customer as a bad debtor. Therefore we have decided to create a special type of allowance, "shortage claims", to enable us to identify how much revenue is lost due to shortage claims by individual customers, and we can address the issue with any customer(s) that have excessive shortage claims.
 

Drmdcpa

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Whether the product shipped and/or was recieved is somewhat mute. At issue is how the original transaction was booked, and making sure the books accurately reflect economic reality.

I am reminded of managers and sales people that are paid bonuses based on performance when they are unethical or tired of the company. What they do is create a lot of empty sales. They then collect their bonus and leave. Afterwards the company realizes the recievables and related sales are fictitious.

So if you record sales that may not have happened and then book a bad debt against the recievable and income, you are distorting the top line.

It would be better to book actual net sales (gross less returns and allowances) rather than inflate sales only to reduce net income by bad debt expense.
 
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Thanks for your input Drmdcpa. I completely agree with you in "At issue is how the original transaction was booked and making sure the books accurately reflect economic reality", and in "... better to book actual net sales... rather than inflate sales and reduce net income by bad debt expense." - especially when you consider commissions/bonuses.

I am recording as you suggest - an allowance to reduce net sale; I'm sure this is the right thing to do based on the counsel of you and others more knowledgeable than me,

The way our process works, no sales reps get a chance to inflate these numbers in order to boost their commission (I too have seen that happen at other places), but bonuses/commissions do get paid based on sales; so from this standpoint it really makes sense to record the customers' reduced payment as a reduction to net sales.

It's just really difficult for me (personally) to not think of it it as bad debt, because when the original transactions were/are booked, we fully expect(ed) to be paid for what we provided (as reflected by three quality checks).

Thanks again!
 

Drmdcpa

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If sales were originally booked at full value with a corresponding booking of accounts receivable then it should be booked as bad debt to remove the recievable. But doing it this way will distort the sales figure.
 
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Sales allowance might seem a little misleading (as also mentioned by a fellow earlier). A bad debt is the preferable option here as it takes the spotlight off your company
 

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