Purchase Return & Allowances Journal Entries

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  • 0:04 Purchase Returns
  • 1:24 Allowances
  • 2:21 Financial Statement Impact
  • 2:36 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

Merchandise may need to be returned for a variety of reasons, including defects, damages or wrong sizes. Allowances reduce the sale price when defective goods are retained by the buyer. Journal entries for both are illustrated with examples.

Purchase Returns

Carla's Clothing is a mid-priced retailer of women's apparel. Carla is always on the lookout for quality items at the best prices from her suppliers. Her customers love the value at Carla's and having good relationships with her suppliers is one of the things that makes it possible.

When new shipments of clothing arrive, Carla always checks them over carefully. Suppliers don't always get everything right. Sometimes she has to send things back or get price adjustments. Carla is always careful with her orders so she gets the number of each size that she thinks she can sell quickly. Suppliers, though, may make mistakes by sending too much of one size and too little of another!

Today a shipment of jeans came in to her store. They were a great buy at $19 bucks a pair. But, she is going to have to return ten of them because they aren't the sizes that she ordered. She calls the supplier and they agree to take them back. Here is the journal entry she puts into the system:

Return 1

The credit to purchase returns and allowances reduces what will be added to the inventory by the amount of the returned items. The debit to accounts payable reduces Carla's balance owed to the supplier. Carla uses a separate account for purchase returns and allowances because she likes to keep tabs on the amount. Returns are inconvenient and can cost money. She likes to see that account decreasing as a percent of total purchases!

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