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Inventory: Merchandising Transactions
Chapter 7 Appendix
Purchase Allowances
Continuing with the above example, assume Tools 4U found another $300 worth of unsatisfactory
inventory. Suppose the supplier offers a 20% allowance to Tools 4U to keep the goods, rather
than return them. This results in an allowance of $60 ($300 x 20%). When a periodic inventory
system is used, the credit will also be recorded in the
purchase returns and allowances account as shown in
Figure 7A.5.
Purchase Discounts
The supplier may offer credit terms and a discount period to encourage early payments. In a periodic
inventory system, the amount of the discount is credited to another contra expense to purchases
called
purchase discounts
.This is another account that is part of cost of goods sold. By crediting
this account, instead of simply crediting the inventory account as in the perpetual inventory system,
management is able to track the amount it is saving by paying suppliers within the discount period.
We will now show the journal entries for both the purchase and payment from Tools 4U who
bought goods from Roofs and More in the amount of $4,200 on January 10. The supplier allows
2/10, n/30 on all invoices. Since Tools 4U had excess cash at this time, the manager chose to take
advantage of the cash discount by paying the invoice within 10 days.
The original entry for the purchase is shown in Figure
7A.6.
Journal
Page 1
date
2016
account title and explanation debit Credit
Jan 5 Accounts Payable
60
Purchase Returns and
Allowances
60
Record purchase allowance for a
supplier
____________
fIGuRe 7A.5
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
CURRENT ASSETS
CASH
INVENTORY
ACCOUNTS
RECEIVABLE
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
LONG-TERM
ASSETS
ACCOUNTSPAYABLE
BANK LOAN
CURRENTLIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
OWNER’S EQUITY
OWNER’S
CAPITAL
OPERATING INCOME
PURCHASES
$10,000 DR
PURCHASE RETURNS
& ALLOWANCES
+ $300 CR
+ $60 CR
$10,000 CR
– $300 DR
– $60 DR
Journal
Page 1
date
2016
account title and explanation debit Credit
Jan 10 Purchases
4,200
Account Payable
4,200
Purchase of goods from Roofs and
More
____________
fIGuRe 7A.6
INCOME STATEMENT
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
CURRENT ASSETS
CASH
INVENTORY
ACCOUNTS
RECEIVABLE
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
LONG-TERM
ASSETS
ACCOUNTS
PAYABLE
BANK LOAN
CURRENTLIABILITIES
UNEARNED
REVENUE
LONG-TERM
LIABILITIES
OWNER’S EQUITY
OWNER’S
CAPITAL
OPERATING INCOME
PURCHASES
+$4,200 DR
+$4,200 CR
