Final answer:
A sales allowance resulting in store credit is recorded with a debit to Sales Returns and Allowances. This reflects the decrease in gross sales revenue and recognizes the company's future obligation, which is credited to a liability account like Store Credit Outstanding.
Step-by-step explanation:
When a sales allowance results in issuing store credit instead of a cash refund, it is recorded in the accounting books with a debit to Sales Returns and Allowances and a credit to Store Credit Outstanding or a similar liability account. This transaction reflects the company's obligation to provide a future economic benefit to the customer, essentially a promise of goods or services, which is why the credit portion goes to a liability account.
The debit to Sales Returns and Allowances decreases the gross sales revenue reported on the income statement to accurately represent the reduced amount the company will retain after fulfilling the store credit. In practice, suppose a customer returns a product worth $100 due to a defect and is given a $100 store credit. The journal entry would be a debit of $100 to Sales Returns and Allowances and a credit of $100 to Store Credit Outstanding. This entry would adjust the sales figures for true and fair reporting and recognize the future obligation.