Accounting for Purchases and Cash Payments, Page 7

Merchandising Purchasing on Account

Purchasing Returns and Allowances

A purchase return occurs when a business returns merchandise to the supplier for full credit.

A purchase allowance occurs when a business keeps less than satisfactory merchandise and pays a reduced price.

The Purchase Return and Allowances Accounts is used to record the return of merchandise to a supplier or to record an allowance. It is classified as a contra cost of merchandise account to the purchase account. The normal balance of Purchases Account is debit; thus, the Purchase Returns and Allowances Account has a credit balance.

Details related to debit and credit for this account are listed below: 

1. A debit memorandum (or memo) is used to notify suppliers (creditors) of a return or to request an allowance. 
2. The “debit” in debit memorandum indicates that the creditor’s account will be debited, or decreased. 
3. A debit memorandum always results in a debit (decrease) to the accounts payable controlling account in the general ledger, and to the creditor’s account in the subsidiary ledger. 
4. The account credited depends on whether the debit memorandum is for merchandise or another asset.

Example 1:

The following example illustrates the purchasing details of Olympic Sports Wear. The merchandise purchase amount is $4,600, on account from Rex Warehouse; invoice no. 123.

Step 1: Analysis 

• Identify: The accounts affected are Purchases Account, Accounts payable (controlling), Accounts Payable: Rex Warehouse (Subsidiary). 
• Classify: Purchases Account is a cost of merchandise account. Accounts Payable (controlling) and Accounts Payable: Rex Warehouse (Subsidiary) are liability accounts. 
• Effects: Purchases Account is increased by $4,600. Accounts payable (controlling), and Accounts Payable: Rex Warehouse (Subsidiary) are increased by $4,600 each.

Step 2: Debit – Credit Rule: 

• Increases to cost of merchandising are recorded as debit. Debit Purchases Account $4,600. 

• Increases to liability account are recorded as credit. Credit Accounts payable (controlling) and Accounts Payable: Rex Warehouse (Subsidiary) for $4,600 each.

Step 3: Prepare a T Account: 

Step 4: Make a Journal Entry 



Example 2:

This example illustrates the purchase details of Olympic Sports Wear. The company purchased computer on account for $2,400 from Win Store Supply on account, invoice number: 321.

Step 1: Analysis 

• Identify: The accounts affected are Computer Equipment Account, Accounts Payable (controlling), and Account Payable: Win Store Supply (Subsidiary). 
• Classify: Computer Equipment is an asset account. Accounts Payable (controlling) and Account Payable: Win Store Supply (Subsidiary) are liability accounts. 
• Effects: Computer Equipment is increased by $2,400, Accounts Payable (controlling), Account Payable: Win Store Supply (Subsidiary) are increased by $2,400.

Step 2: Debit – Credit Rule: 

• Increases to asset accounts are recorded as debit. Debit Computer Equipment $2,400 
• Increases to liability accounts are recorded as credit. Credit Accounts Payable (controlling) and Account Payable: Win Store Supply (Subsidiary) for $2,400 each

Step 3: Prepare a T Account 





Step 4: Make a Journal Entry