Purchase Returns and Allowances: Definition
The refunds and other allowances given by suppliers on merchandise originally purchased for resale are known as purchase returns and allowances.
Journal Entry
When merchandise purchased on account is returned, or when an allowance is requested, an entry is made in the purchase returns and allowances journal.
Any entry relating to the return of merchandise purchased for cash is recorded in a cash receipts journal.
Explanation
In merchandising, a return occurs when a customer returns to the seller part or all of the items purchased.
When merchandise is returned to suppliers or a price adjustment (allowance) is requested, the buyer usually contacts the supplier in writing. This written information is called a 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 the purchase returns and allowances journal. All debit memos are serially numbered.
Accounting Treatment
The accounting treatment for purchase returns and allowances is similar to the treatment of sales returns and allowances, except that different accounts are involved. These include purchase returns and allowances, as well as accounts payable.
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.
If 1 television costing $280 is found to be defective and is returned, the Russell Company will make the following entry:
The purchase returns and allowances account is offset against total purchases when calculating the cost of goods sold. The ultimate effect is to reduce the cost of goods sold.
Although the purchases account can be credited directly for any returns and allowances, the use of the purchase returns and allowances account gives management more control over these items.
Format of Purchase Returns and Allowances Journal
The format of the purchase returns and allowances journal is shown below:
A description of the columns in the above format is:
- Date column: Used to record the date on which merchandise is returned to a supplier.
- Account debited column: Used to record the name of the supplier to whom merchandise is returned.
- Debit memo no. column: Used to record the identifying number of the relevant debit memorandum.
- Posting reference column: Used to record the supplier’s account number, showing that the entry has been posted to the ledger account.
- Amount column: Used to record the amount of the merchandise returned.
Posting Entries to Purchase Returns and Allowances Journal
Entries from the purchase returns and allowances journal are posted to the accounts payable subsidiary ledger and general ledger. The process followed is described below.
- The individual amounts are posted as debits to their respective accounts in the accounts payable subsidiary ledger.
- The total of the purchase returns and allowances journal is posted as a debit to accounts payable account and as a credit to the purchase returns and allowances account in the general ledger.
Example
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.
Required:
- Record the above transactions in the purchases journal and purchase returns and allowances journal.
- Post entries to the accounts payable subsidiary ledger and general ledger.
Solution
Purchases journal and purchases returns and allowances journal:
Accounts payable subsidiary ledger:
General ledger:
