---
title: "Purchase Returns and Allowances | Financial Accounting I"
description: "Purchase Returns and Allowances are reductions to merchandise purchases from returned or defective goods, used in Financial Accounting I to net purchases and COGS."
canonical: "https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances"
type: "key-term"
subject: "Financial Accounting I"
---

# Purchase Returns and Allowances | Financial Accounting I

## Definition

Purchase Returns and Allowances are the reductions in a buyer's merchandise cost when goods are returned or kept with a price adjustment. In Financial Accounting I, they lower Merchandise Purchases and net into Cost of Goods Sold.

## What It Is

Purchase Returns and Allowances are the amount a merchandising company subtracts from what it originally recorded as Merchandise Purchases when some goods are sent back or the supplier gives a price break. In Financial Accounting I, this is not treated like a separate expense for every return. It is a reduction of the cost of inventory bought for resale.

A purchase return happens when the buyer sends goods back because they are damaged, incorrect, or otherwise unacceptable. A purchase allowance happens when the buyer keeps the goods but the seller agrees to reduce the price, often because of a defect, delay, or quality issue. Both situations lower the buyer's net cost.

Under the periodic inventory system, you usually record the original purchase in the Merchandise Purchases account, then reduce that account when a return or allowance occurs. That is why this term shows up in the net purchases calculation instead of sitting directly inside Cost of Goods Sold during each transaction. The adjustment waits there until the end of the accounting period.

The basic pattern is:
Merchandise Purchases minus Purchase Returns and Allowances equals Net Purchases.
Then Net Purchases is part of the formula used to compute Cost of Goods Sold. So if a company buys $10,000 of inventory and later returns $1,000, the net purchases from that buying activity become $9,000 before other inventory adjustments are made.

A common mistake is treating returns and allowances like sales returns from the seller's side. Here, you are on the buyer's side. You are tracking the cost of merchandise you intended to resell, not revenue from customers. That distinction matters because the account affects purchases and inventory cost, not sales revenue.

## Why It Matters

Purchase Returns and Allowances show how a merchandising company keeps its inventory records honest. If you ignore them, your purchases look too high, your net purchases are overstated, and your cost of goods sold can end up wrong at the end of the period.

This term connects directly to the periodic inventory system, where inventory costs are not updated after every sale. Instead, you gather purchase activity during the period and then use those numbers to build the cost of goods sold calculation. Returns and allowances are part of that buildup, so they affect the final profitability picture.

It also shows up in the multi-step income statement for merchandising companies. When the statement breaks out purchase returns and allowances, you can see how much of the company's original buying activity got reversed or discounted. That gives a cleaner view of purchasing behavior than a single lump-sum cost number.

For classwork, this term often appears in journal-entry problems, worksheet adjustments, and income statement calculations. If you can spot whether an event is a return, an allowance, or a normal purchase, you can place it in the right account and keep the merchandise cycle straight.

## Connections

### Merchandise Purchases

This is the starting point for the merchandise cost calculation. Purchase Returns and Allowances reduce Merchandise Purchases, so the two accounts work together when you figure net purchases. If you record the purchase correctly but forget the return or allowance, your ending cost numbers will be too high.

### Periodic Inventory System

Under the periodic system, inventory-related accounts are updated in batches instead of after every sale. That is why purchase returns and allowances are collected in the purchasing records and then folded into the period-end cost of goods sold calculation. They are part of the system's end-of-period math.

### Cost of Goods Sold (COGS)

Returns and allowances affect COGS indirectly by lowering net purchases, which feeds into the COGS formula. They do not sit in the same place as selling expenses or operating costs. If you misplace them, you can distort gross profit.

### [Accounts Payable](/financial-accounting/key-terms/accounts-payable)

If the original merchandise was bought on credit, a return or allowance usually lowers what the company owes the supplier. That means the adjustment may reduce Accounts Payable instead of creating a cash refund right away. This is why the transaction side matters when you record the entry.

## On the AP Exam

A problem set or quiz item will usually give you a purchase, then a later return or allowance, and ask for the journal entry or the net purchases total. You need to know whether the reduction goes against Merchandise Purchases, Accounts Payable, or Cash, depending on how the original purchase was made. In a multi-step income statement question, you may also need to place Purchase Returns and Allowances as a deduction from purchases before calculating COGS. The fastest move is to trace the flow: original purchase, minus return or allowance, equals net purchase cost. If the question mentions defective goods that were kept, that is an allowance, not a return.

## Purchase Returns and Allowances vs Sales Returns and Allowances

Purchase Returns and Allowances are recorded by the buyer and reduce the cost of merchandise purchased from suppliers. Sales Returns and Allowances are recorded by the seller and reduce sales revenue from customers. The direction flips depending on which side of the transaction you are on.

## Key Takeaways

- Purchase Returns and Allowances reduce the buyer's Merchandise Purchases account in Financial Accounting I.
- A purchase return means the goods go back to the supplier, while a purchase allowance means the buyer keeps the goods and gets a price reduction.
- Under the periodic inventory system, this term is part of the net purchases calculation, not a running inventory update after each sale.
- The term affects gross profit indirectly because it lowers the amount used in the Cost of Goods Sold formula.
- If the original purchase was on credit, the adjustment usually reduces Accounts Payable rather than creating a new cash transaction.

## FAQs

### What is Purchase Returns and Allowances in Financial Accounting I?

It is the account used to track reductions in the cost of merchandise a company bought from suppliers. The reduction comes from returned goods or from price adjustments on goods the company keeps. In the periodic system, it lowers Merchandise Purchases before net purchases and Cost of Goods Sold are calculated.

### How do Purchase Returns and Allowances affect Cost of Goods Sold?

They lower the amount of merchandise cost that goes into the COGS formula. First, you subtract purchase returns and allowances from merchandise purchases to get net purchases. Then that lower purchase total helps produce a lower cost of goods sold.

### What is the difference between a purchase return and a purchase allowance?

A purchase return means the buyer sends the merchandise back to the seller. A purchase allowance means the buyer keeps the merchandise but gets a reduction in price because of a problem such as damage or a defect. Both reduce the buyer's merchandise cost.

### How do you record Purchase Returns and Allowances on a credit purchase?

If the original purchase was on account, the return or allowance usually reduces Accounts Payable and reduces Merchandise Purchases. That way, the company owes less to the supplier. The exact debit and credit depend on the transaction details, but the goal is always to lower the recorded purchase cost.

## About This Document

Canonical Fiveable pages are available as Markdown at the same path plus `.md`.

- [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns
- [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing
- [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`)
- [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`)

## Structured Data

```json
{"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances#resource","name":"Purchase Returns and Allowances | Financial Accounting I","url":"https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-07-03T02:21:40.442Z","isPartOf":{"@type":"Collection","name":"Financial Accounting I Key Terms","url":"https://fiveable.me/financial-accounting/key-terms"},"author":{"@type":"Organization","@id":"https://fiveable.me/editorial#content-team","name":"Fiveable Content Team","url":"https://fiveable.me/editorial","parentOrganization":{"@id":"https://fiveable.me/#organization"},"member":[{"@type":"Person","name":"Amanda DoAmaral","sameAs":["https://www.linkedin.com/in/adoamaral"]},{"@type":"Person","name":"Becky Bahr","sameAs":["https://www.linkedin.com/in/becky-bahr-b52743132"]}]},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances#term","name":"Purchase Returns and Allowances","description":"Purchase Returns and Allowances are the reductions in a buyer's merchandise cost when goods are returned or kept with a price adjustment. In Financial Accounting I, they lower Merchandise Purchases and net into Cost of Goods Sold.","url":"https://fiveable.me/financial-accounting/key-terms/purchase-returns-allowances","inDefinedTermSet":{"@type":"DefinedTermSet","name":"Financial Accounting I Key Terms","url":"https://fiveable.me/financial-accounting/key-terms"}},{"@type":"FAQPage","mainEntity":[{"@type":"Question","name":"What is Purchase Returns and Allowances in Financial Accounting I?","acceptedAnswer":{"@type":"Answer","text":"It is the account used to track reductions in the cost of merchandise a company bought from suppliers. The reduction comes from returned goods or from price adjustments on goods the company keeps. In the periodic system, it lowers Merchandise Purchases before net purchases and Cost of Goods Sold are calculated."}},{"@type":"Question","name":"How do Purchase Returns and Allowances affect Cost of Goods Sold?","acceptedAnswer":{"@type":"Answer","text":"They lower the amount of merchandise cost that goes into the COGS formula. First, you subtract purchase returns and allowances from merchandise purchases to get net purchases. Then that lower purchase total helps produce a lower cost of goods sold."}},{"@type":"Question","name":"What is the difference between a purchase return and a purchase allowance?","acceptedAnswer":{"@type":"Answer","text":"A purchase return means the buyer sends the merchandise back to the seller. A purchase allowance means the buyer keeps the merchandise but gets a reduction in price because of a problem such as damage or a defect. Both reduce the buyer's merchandise cost."}},{"@type":"Question","name":"How do you record Purchase Returns and Allowances on a credit purchase?","acceptedAnswer":{"@type":"Answer","text":"If the original purchase was on account, the return or allowance usually reduces Accounts Payable and reduces Merchandise Purchases. That way, the company owes less to the supplier. The exact debit and credit depend on the transaction details, but the goal is always to lower the recorded purchase cost."}}]},{"@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Financial Accounting I","item":"https://fiveable.me/financial-accounting"},{"@type":"ListItem","position":2,"name":"Key Terms","item":"https://fiveable.me/financial-accounting/key-terms"},{"@type":"ListItem","position":3,"name":"Purchase Returns and Allowances"}]}]}
```