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Chapter 5: Problem 6

What is the primary difference between a merchandise return and a merchandise allowance?

Short Answer

Expert verified
A merchandise return involves returning the product for a refund; a merchandise allowance offers a discount without returning the product.

Step by step solution

01

Define Merchandise Return

A merchandise return occurs when a customer returns a purchased product to the seller. The transaction is reversed, and the customer typically receives a refund or store credit for the full purchase price of the item. This process is initiated by the customer when they are dissatisfied with a purchase or have received a defective product.
02

Define Merchandise Allowance

A merchandise allowance is a partial refund or discount given to the customer while they keep the product. This is usually offered when the product is slightly damaged or not as expected, but the customer is willing to retain the item at a reduced cost. Merchandise allowances allow the seller to resolve complaints without processing a full return.
03

Compare Merchandise Return and Allowance

The primary distinction lies in the resolution; a merchandise return involves the customer returning the product for a full refund or credit, whereas a merchandise allowance provides a discount or partial refund, allowing the customer to keep the product despite minor issues. Both methods aim to maintain customer satisfaction but differ in their approach to handling dissatisfaction.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Merchandise Return
A merchandise return occurs when a customer brings back an item they purchased to the store or seller. This situation usually arises when the product is defective, not as described, or simply doesn't meet the customer's expectations. Upon the return, the seller reverses the transaction, providing the customer with a full refund or store credit for the item price.
Understanding merchandise returns is essential as they play a critical role in retail operations. Here are a few points to remember:
  • Merchandise returns help maintain a store's reputation by resolving customer dissatisfaction.
  • They can involve the customer receiving a refund, store credit, or sometimes an exchange for a different product.
  • Returns are often governed by a store's refund policy, which dictates terms like the return window and conditions.
Handling merchandise returns efficiently is key to ensuring customers remain satisfied and continue to patronize the business.
Merchandise Allowance
A merchandise allowance, unlike a return, allows the customer to keep the product while providing a partial discount or refund. This usually occurs if the product has minor issues, such as small defects or not matching the customer's expectations fully, yet the product is still usable.
Merchandise allowances offer several advantages, such as:
  • Sellers resolve minor complaints without the logistics involved in a return.
  • Customers retain the item at a lower cost, which can lead to increased customer satisfaction.
  • Reducing the number of returned items can help the retailer save on return processing costs.
By providing a merchandise allowance, sellers can offer a more flexible and customer-friendly approach, enhancing overall customer experience.
Customer Satisfaction
Customer satisfaction is crucial to the success of any business. Ensuring customers are happy with their purchases and the service they receive promotes loyalty and repeat business.
Both merchandise returns and allowances play vital roles in achieving customer satisfaction by offering solutions to customer issues:
  • A quick and fair return process can boost a customer鈥檚 faith in the brand.
  • Offering a merchandise allowance might make the customer feel valued, as they perceive getting a better deal.
  • Consistent and clear communication about return and allowance options helps in setting correct expectations.
Focusing on customer satisfaction means always looking for ways to improve these processes, exceeding expectations and minimizing issues before they arise.
Refund Policy
A refund policy outlines how returns and allowances are handled and is important for setting customer expectations. It's essentially a set of rules agreed upon between the seller and the customer, specifying conditions under which items can be returned or approved for allowances.
To maximize effectiveness, a good refund policy should:
  • Be clear and easily understandable to prevent confusion or disputes.
  • Outline the time frame for returns and conditions for merchandise allowances.
  • Include information on how refunds will be processed, such as timelines for receiving funds back.
  • Balance protecting the business鈥檚 interests with being fair to customers.
Having a transparent, customer-friendly refund policy not only encourages purchases by building trust but can also significantly reduce the volume of customer service issues.

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Most popular questions from this chapter

Recording Purchases-Perpetual System On September 12, Burt, Inc., purchased merchandise for \(\$ 4,800\), with terms of \(2 / 10, n / 30\). On September 16, the firm returned \(\$ 500\) of the merchandise to the seller. Payment of the account occurred on September 19. Burt uses the perpetual inventory system. Required a. Prepare the journal entries for September 12, September 16, and September \(19 .\) b. Assuming that the account was paid on September 25, prepare the journal entry for payment on that date.

Spink Company purchased merchandise with a list price of \(\$ 4,000\) from the Thompson Company. Thompson offers a 2 percent cash discount if payment is received within 10 days. What is the payment amount if the cash discount is taken?

Cost of Goods Sold and the Periodic System Layla Company uses the periodic inventory system. Layla started the period with \(\$ 22,000\) in inventory. The company purchased an additional \(\$ 25,000\) of merchandise and returned \(\$ 3,000\) for a full credit. If Layla's cost of goods sold during the period was \(\$ 31,000\), what must have been the total of the physical inventory count?

Revenue Recognition Standard-Adjusting Journal Entries-Sales Returns and Allowances During the year, Raul Company sells merchandise on account totaling \(\$ 2,000,000\) (the cost to Raul for this merchandise was \(\$ 800,000\) ). Raul allows a 60 -day return privilege for the merchandise it sells. At year-end, Raul estimates there remain \(\$ 400,000\) of sales (with a cost to Raul of \(\$ 160,000\) ) that are still within the 60 -day return period. Based on past experience, Raul expects 5 percent of this merchandise to be retumed. Prepare the period-end adjusting journal entries needed for Raul Company to comply with the revenue recognition standard. Raul's fiscal year-end is December 31 .

Cost of Goods Sold and the Periodic System Kuyu Company uses the periodic inventory system. Kuyu started the period with \(\$ 12,000\) in inventory. The company purchased an additional \(\$ 25,000\) of merchandise, and retumed \(\$ 1,500\) for a full credit. A physical count of inventory at the end of the period revealed that there was an ending inventory balance of \(\$ 6,000\). What was Kuyu's cost of goods sold during the period?
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