This article is relevant if you are using NetSuite and you need to implement an allowance accrual program.

Background

In many industries, including retail, it is a common practice to produce allowance accounting in order to account for anticipated returns or other discounts that may be taken for promotional programs. We also often see this accounting practice in credit risky industries with Bad Debts Expense and the Allowance for Doubtful Accounts.

Based on the accrual method of accounting, the approach is to recognize expenses in the period for which they occur and matched with corresponding revenue. As an example, when a business anticipates that a portion of sales will be returned, at the time of the sale, the can estimate the percentage of sales that will return, before customers actually return the goods. Under the allowance method of accounting, the company will immediately recognize an expense for returns and at the same time, reserve a liability for anticipated customer return requests. This helps management make better interpretations of their economic performance while recognizing an obligation to a set of customers that will return goods.

NetSuite offers general accounting for sales through invoice processing. Without any additional software logic, allowance accounting is a period end practice which is based on reports and journal entries. Because it is a manual process, it adds time to the period end process and may demand specialized reporting to determine the appropriate sales that need allowance accruals.  Based on today’s emerging standards, manual practices are considered an antiquated practice.

Note, a related article discusses how order specific programs have been automated and was used with this Allowance offering.

SuiteGL Brings Allowance Accounting Automation

With the advent of NetSuite SuiteGL, we now have the ability to enhance NetSuite’s native GL posting routine. This means that we can, at the transaction level, produce the accruals that otherwise would have been done at period end. This fits nicely in the real-time nature of the application and ensures that management’s policies are being adhered to.  For those more technically minded, see article “NetSuite Up Close: Custom GL Lines Plug-in to Reclass General Ledger Postings”.

For a client that is serving major US retailers, we designed a Sales, Returns and Promotional Allowance program that takes advantage of SuiteGL and the SuiteCloud platform. The elements of the program account for the following:

1. Definition of allowance programs
2. Linkage to customers who are applicable to the programs
3. Allowance accruals for invoices / cash sale processing
4. Negative allowance accruals for credit memos
5. Special handling for returns processing

On simple terms, multiple programs can be in play simultaneously. Only certain products or customers may apply and only within certain timeframes. The definition of the allowance rule holds the accounting information needed to ensure that candidate transactions have allowance programs properly applied. Switches are offered to indicate if invoice based discounts also participate in the accrual.

Assuming a simple 2% allowance rule, during invoice processing, the basic accounting is as follows:

NetSuite native invoice transaction
	Dr	Accounts Receivable		$1,000
		Cr	Sales				$1,000

SuiteGL Allowance Application
	Dr	Sales Allowance Expense		$20
		Cr	Sales Allowance Accruals	$20

Assume a basic credit memo for a sale that was not a return but other reason:

NetSuite native credit memo transaction
	Dr	Sales				$200
		Cr	Accounts Receivable		$200

SuiteGL Allowance Application
	Dr	Sales Allowance Accruals	$4
		Cr	Sales Allowance Expense		$4

Returns Allowance Processing Automation

Actual returns require additional handling under this program due to the way NetSuite handles Return Authorization and Credit Memo accounting. Assuming a return of $300 for a good that participated in the 2% returns allowance program, the automation facilitates the following accounting:

NetSuite native credit memo transaction
	Dr	Sales				$300
		Cr	Accounts Receivable		$300

SuiteGL Allowance Application
	Dr	Returns Allowance Accruals	$300
		Cr	Sales				$300

The net result of this transaction is to reduce the returns accrual allowance by the credit that was offered on the customer’s accounts receivable account.

Get the Sales Allowance Accruals SuiteBundle

We are different from other NetSuite partners. We are very strong in accounting, software architecture and NetSuite.  In the hands of the right talent, the NetSuite platform is an expression of liberty and freedom.  We love to help our clients realize their business goals and excel in complex endeavors.  Should you have a challenging allowance program that needs to be implemented, let’s have a conversation.  We can give you a head start and can adapt these algorithms to fit your exact specific situation.

Marty Zigman

Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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