Definition of Purchase Allowance
A purchase allowance is a reduction in the buyer’s cost of merchandise that had been purchased. The purchase allowance is granted by the supplier because of a problem such as shipping the wrong items, an incorrect quantity, flaws in the goods, etc. In the case of a purchase allowance, the buyer does not return the merchandise to the supplier.
Example of a Purchase Allowance
A retailer ordered 10 items at a cost of $15 each from one of its suppliers. A week after receiving the items, the retailer discovered that one of the items had a flaw. When the retailer notified the supplier, the supplier requested that the retailer donate or discard the item and the supplier will issue a credit memo for $15.
Under a periodic inventory system, the retailer will record the supplier’s credit memo with 1) a credit of $15 to the account Purchase Allowances or to the account Purchase Returns and Allowances, and 2) a debit of $15 to Accounts Payable.
The retailer will combine the debit balance in its Purchases account with the credit balance in Purchase Allowances to arrive at the retailer’s net purchases.
The supplier records the credit memo with a debit to Sales Allowances and a credit to Accounts Receivable. The supplier will combine the debit balance in its Sales Allowances account with the credit balance in its Sales account to arrive at its net sales.
