It is not a reduction in the price of goods or services before the delivery. Similarly, it does not offer an early settlement discount, excluding it from cash discounts. A purchase allowance is a reduction in the list price offered by a manufacturer or distributor, in exchange for ordering a minimum quantity. This allowance may also be granted to a customer in exchange for the buyer’s retention of damaged or incorrect goods.

Journal Entry for a Purchase Allowance

The purchase returns and allowances account under the periodic inventory system is recorded to the purchase returns and allowances account which is the contra purchases account. Unlike the periodic inventory system, the purchase returns and allowances are recorded directly as a reduction of merchandise inventory under the perpetual inventory system. When a supplier grants a purchase allowance, the buyer records the amount of the allowance as a debit to accounts payable and a credit to inventory. The seller records the allowance in the sales allowances account; this is a contra revenue account that is paired with and offsets gross sales. The seller also records a reduction in its accounts receivable account via a credit memo, thereby reducing the receivable expected from the buyer. Purchase return and allowances are the contra account of the purchases account in the periodic inventory system.

1. The account contains deductions from purchases for items returned to suppliers, as well as deductions allowed by suppliers for goods that are not returned.
2. The accounting for purchase return and allowances is straightforward and the recording is different between a perpetual inventory system and a periodic inventory system.
3. When we buy products or goods, there is the possibility of a return back to the supplier due to faulty, damaged, or defective within the agreed timeframe.
4. In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased.

Balance Sheet

The purchase allowance is granted by the supplier because of a problem such as shipping the wrong items, an incorrect quantity, flaws in the goods, etc. In the case of a purchase allowance, the buyer does not return the merchandise to the supplier. Any entry relating to the return of merchandise purchased for cash is recorded in a cash receipts journal. When companies purchase goods from suppliers, they may also offer a purchase returns policy.

All of our content is based on objective analysis, and the opinions are our own. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both enterprise small and medium sized companies and has run small businesses of his own.

To illustrate, suppose that the Russell Company purchased 10 television sets for future resale at a total cost of $2,800. The periodic inventory system is used, and the payable amount is recorded at the gross or invoice price. Companies incur expenses that are essential in helping generate revenues.

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. A debit memo is a document sent by a purchaser to the seller showing the amount by which the purchaser proposes to debit the seller’s account. In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased.

Companies report these accounts as a reduction in the purchases to figure to reach net purchases. When it returns these goods to the supplier, the accounting entries may differ. Some suppliers may offer exchange products for the returned goods.

In the perpetual inventory system, the purchase return and allowances are adjusted directly by reducing the merchandise inventory account. The above explanation provides a basis to record purchase returns and allowances. As mentioned, these transactions do not impact the purchases account. Nonetheless, it is crucial to understand how a company records the purchase of products or services. The purchases allowance account is a contra expense account meaning that it is normally a credit balance. When offset against the purchases account the purchase allowance reduces the cost of net purchases to the business.

When companies incur an expense, this concept requires them to record it. It does not need a cash settlement to become eligible for recording. Since companies already record the purchase expense, they cannot reduce it unless due to an error. Therefore, they need the purchase returns and allowances accounts to offset it.

In this article, we cover the accounting for purchase return and allowances; especially the purchase return and allowances journal entry under both periodic and perpetual inventory systems. When we buy products or goods, there is the possibility of a return how to upload your form 1099 to turbotax back to the supplier due to faulty, damaged, or defective within the agreed timeframe. The accounting for purchase return and allowances is straightforward and the recording is different between a perpetual inventory system and a periodic inventory system.

A reduction in the cost of goods purchased that is granted by a supplier without the physicalreturn of the goods. Once the company establishes the quality and quantity of goods it needs, it will place an order with a supplier. For some companies, the process may also involve looking for various suppliers and selecting the best option. However, other companies may have a pre-approved list of suppliers from which they purchase goods. As you can see, under the perpetual inventory system the merchandise inventory reduced by $100.

Purchase returns and allowances is an account that is paired with and offsets the purchases account in a periodic inventory system. The account contains deductions from purchases for items returned to suppliers, as well as deductions allowed by suppliers for goods that are not returned. This contra account reduces the total amount of purchases made, which therefore also reduces the ending inventory balance. Therefore, ABC Co. returned those goods to the relevant suppliers.

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Assuming a periodic inventory system the allowance journal entry is recorded in the accounts as follows. A company, ABC Co., made total purchases of $500,000 during the last accounting period. The company recorded these purchases in its books using the following journal entries. Sometimes, the supplier does not offer goods in exchange, or the company does not exchange. This compensation may include cash return or reduction in balance with the supplier. The accounting entries for this transaction will be as follows.

Some companies may keep two separate accounts for purchase returns and purchase allowances. However, others may maintain both of them under the same account due to their similar nature. Regardless of its presence in the books, both accounts reduce the purchases figure in the financial statements.

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Usually, companies get raw materials or finished goods from external sources. Usually, the purchase process begins with a company identifying the need to buy raw materials or finished goods. Let’s assume that ABC Co buys goods to its supplier on 02 January 20X1 for $3,500. In the purchase agreement, ABC Co would be able to return the goods if there is any damage or defect. On 05 January 20X1, ABC Co finds out that some of the goods received are defective. Therefore, ABC Co issues a debit memorandum and returns such goods back to its supplier with a value of $100.