Purchase returns and allowances definition
/What are Purchase Returns and Allowances?
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.
Presentation of Purchase Returns and Allowances
The purchase returns and allowances account does not usually appear in the financial statements, since it generally has a minor account balance, and so is merged into other related accounts for presentation purposes.
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Example of Purchase Returns and Allowances
A retail store, StyleMart, buys 100 shirts from a supplier at $20 each, totaling $2,000. Upon inspection, StyleMart finds that 10 shirts are defective and returns them to the supplier. The supplier accepts the return and issues a credit of $200 (10 shirts × $20 each). Additionally, the supplier offers a $50 allowance for minor defects found in some of the remaining shirts, which StyleMart decides to keep and sell at a discount.
In this scenario, the total purchase returns and allowances would be:
Return of defective shirts: $200
Allowance for minor defects: $50
Total purchase returns and allowances: $250
To record these transactions, StyleMart reduces its accounts payable liability by $250, and records the offsetting amount in its purchase returns and allowances account.