Purchase returns and allowances

Definition

Purchase returns and allowances are reductions in the cost of goods purchased due to returned merchandise or agreed-upon allowances for damaged goods. These adjustments are recorded by the buyer and reduce the inventory value on hand.

5 Must Know Facts For Your Next Test

1. Purchase returns occur when a buyer sends back goods to the seller, often due to defects or incorrect items.
2. Allowances are price reductions granted by the seller for minor defects, wrong specifications, or other issues without returning the goods.
3. Both purchase returns and allowances decrease the total cost of inventory purchased.
4. They are typically recorded in a contra account called 'Purchase Returns and Allowances' which offsets total purchases.
5. Frequent purchase returns and allowances can indicate problems with suppliers or purchasing processes.

Review Questions

Related terms

Sales Returns and Allowances:

Reductions in sales revenue due to returned merchandise or allowances given to customers.

Inventory Shrinkage:

Loss of inventory due to factors such as theft, damage, or administrative errors.

Net Purchases:

The total amount of purchases minus purchase returns, allowances, and discounts.