Final answer:
GAAP requires the recognition of sales returns/allowances when there is a possibility of customers returning goods or when customers are granted allowances due to defects or damages in the goods.
Step-by-step explanation:
Generally Accepted Accounting Principles (GAAP) require the recognition of sales returns/allowances when there is a possibility of customers returning goods or when customers are granted allowances due to defects or damages in the goods.
For example, if a customer purchases a faulty product and is granted a refund or an allowance, GAAP requires the company to recognize the sales return/allowance in its financial statements. This recognition is important as it ensures that the financial statements reflect the true financial position of the company.
In addition, GAAP also requires companies to estimate returns and allowances based on historical data or other reliable sources and include these estimates in their financial statements.