Purchase Returns and Allowances Merchandise returned by the purchaser to the supplier. Purchase Allowance . . . A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. In addition to purchase discounts, merchandisers also have to deal with returns of inventory and allowances. A purchase return is the return of merchandise by the purchaser to the supplier. An allowance is a price reduction granted to the customer because of some quality issue. An allowance may be given because of a slight defect in the merchandise or because a shipment was late. In these cases, the customer keeps the merchandise and just receives a price reduction as the allowance.

Purchase Returns and Allowances On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. Assume that on November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. Z-Mart’s November 15 entry to update its Merchandise Inventory account to reflect the purchase allowance is a debit to Accounts Payable and a credit to Merchandise Inventory for $300. The buyer’s allowance for defective merchandise is usually offset against the buyer’s current account payable balance to the seller. When cash is refunded, the Cash account is debited instead of Accounts Payable.

Purchase Returns and Allowances Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. Returns are recorded at the net costs charged to buyers. To illustrate the accounting for returns, suppose Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. When goods are returned, a buyer can take a purchase discount on only the remaining balance of the invoice. The resulting discount is $18 (2% x $900) and the cash payment is $882 ($900 - $18). The entries to account for these transactions are illustrated on this slide.

Transportation Costs and Ownership Transfer Transportation costs are sometimes included in the cost of Merchandise Inventory. For example, when buyers pay transportation costs to get merchandise inventory to them, the transportation costs are included in the Merchandise Inventory cost. FOB terms designate when title passes and who pays the transportation cost. FOB stands for “Free On Board.” So, if the shipping terms are Free On Board shipping point, that means that ownership transfers from the seller to the buyer when the seller provides the goods to the carrier. It also means that the buyer will pay the transportation cost. This transportation cost will be added to the merchandise inventory account in a journal entry that debits merchandise inventory and credits cash. On the other hand, if the shipping terms are Free On Board destination, that means that ownership transfers from the seller to the buyer when the buyer receives the goods. It also means that the seller will pay the transportation cost and will record the entry with a debit to delivery expense and a credit to cash.

Transportation Costs P1 Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. When a buyer is responsible for paying transportation costs (FOB shipping point), the payment is made to a carrier or directly to the seller depending on the agreement. The cost principle requires that any necessary transportation costs of a buyer (often called transportation-in or freight-in) be included as part of the cost of purchased merchandise. To illustrate, Z-Mart’s entry to record a $75 freight charge from an independent carrier for merchandise purchased FOB shipping point is a debit to Merchandise Inventory and a credit to Cash for $75.

Accounting for Merchandise P1 The accounting system described in this chapter does not provide separate records (accounts) for total purchases, total purchase discounts, total purchase returns and allowances, and total transportation-in. Yet nearly all companies collect this information in supplementary records because managers need this information to evaluate and control each of these cost elements. Supplementary records, also called supplemental records, refer to information outside the usual general ledger accounts.