What is purchases returns and allowances?
The refunds and other allowances given by suppliers on merchandise originally purchased for resale is called purchases returns and allowances.
The accounting treatment for purchase returns and allowances is similar to that for sales returns and allowances, except that the accounts, Purchases Returns and Allowances and Accounts Payable, are involved. To illustrate, assume that the Russell Company purchased, for future resale, 10 television sets at a total cost of $2,800. The periodic inventory system is used, and the payable is recorded at the gross or invoice price. If 1 television costing $280 is found defective and is returned, the Russell Company will make the following entry:
The Purchase Returns and Allowances account is offset against total purchases in computing cost of goods sold. The ultimate effect is to reduce cost of goods sold. Although the Purchases account could be directly credited for any returns and allowances, the use of the. Purchases Returns and Allowances account gives management more control over these items.
Purchase Returns and Allowances Journal
When merchandise purchased on account are returned or an allowance is requested, the entry is made in purchases returns and allowances journal.
Any entry relating to the return of merchandise purchased for cash is recorded in a cash receipt journal.
When merchandise are returned to suppliers or a price adjustment (allowance) is requested, the buyer usually intimates the supplier in writing. This written information is called debit memorandum or debit memo. 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. It serves as a voucher for entries in purchases returns and allowances journal. All debit memos are serially numbered.
Format of Purchases returns and allowances journal
The format of purchases returns and allowances journal is shown below:
(1). Date column is used to write the date on which merchandise are returned to a supplier.
(2). Account debited column is used to record the name of supplier to whom merchandise are returned.
(3). Debit memo No. column is used to record the number of relevant debit memorandum.
(4). Posting reference column is used to record the account number of the supplier. It shows that the entry has been posted to ledger account.
(5). Amount column is used to record the amount of merchandise returned.
Posting entries to purchases returns and allowances journal
The entries from purchases returns and allowances journal are posted to accounts payable subsidiary ledger and general ledger. The procedure is described below:
- The individual amounts are posted as debits to their respective accounts in the accounts payable subsidiary ledger.
- The total of purchases returns and allowances journal is posted as debit to accounts payable account and as credit to purchases returns and allowances account in the general ledger.
The ABC company engaged in the following transactions during the month of June 2016.
Jun. 04: Purchased merchandise on account from National Enterprise for $640, invoice No. 312.
Jun. 12: Purchased merchandise on account from United Enterprise for $1,400, invoice No. 318.
Jun. 15: Merchandise returned to National Enterprise $150, Debit memo No. 726.
Jun. 18: Purchased merchandise on account from Al-Habib Corporation $445, invoice No. 328.
Jun. 25: Purchased merchandise on account from National Enterprise for $575, invoice No. 340.
Jun. 28: Merchandise returned to Al-Habib Corporation $50, debit memo No. 727.
- Record the above transactions in purchases journal and purchases returned and allowances journal.
- Post entries to accounts payable subsidiary ledger and general ledger.
Purchases journal and purchases returns and allowances journal: