Question

What is a purchase return? What is a purchase allowance? What type of account is the Purchase Returns and Allowance account? What is its normal balance? Explain in 100 words or more.

Answer 1

Purchase Return: It is when the buyer returns the goods purchased to the supplier. Reasons for purchase returns include excess quantity of goods sent by the supplier, quality issues, inadvertent orders placed etc.

The buyer will credit the purchase returns account and debit the accounts payable or cash as the case may be. The supplier issues a credit note or refunds the amount instantly. The Purchase returns a/c will have a credit balance and it is set-off from the purchases account at the end of the period to compute Net Purchases.

Purchase Allowance: It is when the goods are not returned by the buyer in spite of problem with the goods such as quality issues, incorrect amount billed etc. The buyer claims reduction in the billed amount and the same is credited to purchase allowance or purchase returns account. The supplier account or cash is debited.

Purchase Returns and Allowance account: It is a nominal account wherein both purchase returns and deductions in respect of purchases are recorded by the buyer. The buyer will credit this account with all the purchase returns and other deductions claimed from the supplier and debit the supplier's account or cash or bank as the case maybe. At the end of the period, the buyer will set off the purchase returns & allowance account with Purchases account to compute Net Purchases.

Purchase Returns and Allowance account will normally have credit balance.