Purchase returns and allowances

From CEOpedia | Management online
Purchase returns and allowances
See also


Purchases Returns and Allowances is a contra-purchases account used to record purchases returns and purchase allowances. It is reported as a deduction from Purchases on the income statement. We are simply looking at returns and allowances from the buyer's point of view[1].

Because purchases are an expense and normally carry a debit balance, a contra purchase expense will carry a credit balance[2].

Purchases returns and allowances decrease the amount of purchases. Therefore, Purchases Returns and Allowances is a contra account to Purchases. Thus, the normal account balance of Purchases Returns and Allowances is a credit, the opposite of the normal account balance Purchases, a debit. The account is in the cost of merchandise of Hobby Shack's chart of accounts

A purchase return or allowance should be confirmed in writing. A form prepared by the customer showing the price deduction taken by the customer for returns and allowances as a debit (deduction) on the vendor account to show the decrease in the amount[3]

Purchase disounts

This contra account reflects any discount a company receives because it pays a merchandise invoice early. It is the flip side of the contra revenue account „sales discount” -looking at the same event from the eyes of the customer rather than the seller.

The credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment. The buyer calls this cash discount a purchase discount. This incentive offers advantages to both parties: The purchaser saves money, and the seller shortens the operating cycle by more quickly converting the accounts receivable into cash.

Credit terms specify the amount of the cash discount and time period in which it is offered. They also indicate the time period in which the purchaser is expected to pay the full invoice price. This means that the buyer may take 2% cash discount on the invoice price less („net of”) any returns or allowances if payment is made with 10 days of the invoice date ( the discount period). If the buyer does not pay in that time, the invoice price, less any returns or allowances, is due 30 days from the invoice date. Alternatively, the discount period may extend to a specified number of days following the month in which the sale occurs. For example, 1/10 EOM ( end of the month) means that a 1% discount is available if the invoice is paid within the first 10 days of the next month. When the seller elects not to offer a cash discount for prompt payment, credit terms will specify only the maximum time period for paying the balance due. For example, the invoice may state the time period as n/30, n/60, or n/10 EOM. This means, respectively, that the buyer must pay the net amount in 30 days, 60 days, or within the first 10 days of the next month[4].

Purchase allowance

The purchase allowance reduces the cost of the goods he purchased. The purchase supplement is called upon by the supplier due to problems such as

  • late shipment of products,
  • wrong quantity,
  • defects of goods,
  • damage, etc.

In the case of the purchase supplement, the buyer does not apply to the supplier's goods.

References

Footnotes

  1. Heintz J. (ed.)(2007),p.403
  2. Loughran M. (2011)
  3. Bienias Gilbertson C. (ed.)(2008), p.256
  4. Weygandt J. (ed.)(2009),p. 210

Author: Sylwia Szrajber