A sales allowance is a reduction in the price of a good or service that is extended to a buyer due to some sort of issue that arises after the assumed completion of a transaction with a seller. The nature of the issue may be damage sustained by the goods while in transit to the buyer, an error in the quantity of units shipped, or even the failure of the goods or services to perform at the level of quality promised by the seller. Unlike other types of price reductions, a sales allowance typically is granted after the sale is made, not before.
There is often some confusion between the sales allowance and the sales discount. While both strategies do reduce the price that the customer pays, they apply in different situations. A sales discount is extended to the customer on the front end, with the promise of the customer to comply with the seller’s requirements related to that discount. For example, a sales discount may be applied if the customer agrees to purchase a certain number of units or to pay for the order within a specified period of time that is less than the standard thirty days.
By contrast, a sales allowance is applied once the sale has been executed, but before the customer actually remits the payment. Often, the reason for the allowance is to compensate the buyer for any type of inconvenience or lack of satisfaction that is related to the purchased products. Should the product be damaged or in any way inferior to the standards normally set by the seller, the allowance is extended to the buyer as a means of apologizing for the inconvenience, and is often part of an overall process designed to regain customer confidence.
There are situations in which a sales allowance may be extended that do not involve damaged or inferior products. In this scenario, the allowance is used as a sales promotion tool, providing the customer with an unsolicited and unexpected price break once the delivery of the products is confirmed. Typically, this type of allowance appears on the invoice mailed to the customer, along with an explanatory note of thanks for doing business with the supplier.
A sales allowance may be extended as a flat amount or as a percentage of the total amount due on the order. An allowance normally relates to a single event, and does not automatically apply to orders that are processed in the future. One possible exception is if the supplier extends a twenty-five percent reduction due to defects in the delivered products, and also extends the same reduction on the next order placed by the customer, as a means of encouraging the customer to give the supplier another chance. There is some difference of opinion if that second reduction should be classified as a sales promotion, a sales discount, or as a sales allowance. Typically, the determination of what to call that second reduction is based on the accounting practices of the supplier, as well as the corporate culture of that supplier.