24-25 Purchases, Returns, Allowances and Discounts

Purchases

Returns and Allowances, Discounts

Purchases will normally have a debit balance since it represents additions to the inventory, an asset. The contra account purchases returns and allowances will have a credit balance to offset it

New Accounts:

Purchases (+ -)

Purchase Returns and Allowances (- +)

Purchase Discounts (- +) ​contra expense account

Multiple Select

Choose all accounts that carry a normal credit balance.

• Purchases

• Purchase Returns and Allowances

• Assets

• Sales Discounts

• Purchase Discounts

Purchase Discount Example

Marco Company purchased $1500 of merchandise with the terms 2/10 net 30

• Purchase price = 1,500

• Purchase discount % = 2%

• Purchase discount = Purchase price x Discount %

• Purchase discount = 1,500 x 2% = 30

• Amount to pay = Purchase price - Purchase discounts

• Amount to pay = 1,500 - 30 = 1,470

Purchase on Account:

At the time of Purchase Journal entry

DR Purchases $1,500

CR Accounts Payable $1,500

Marco Company purchased $1500 of merchandise with the terms 2/10 net 30

Multiple Choice

The Good Morning Shop purchased merchandise on account from The Donut Plant for $300. The journal entry for The Good Morning Shop to record this transaction is:

• debit Accounts Payable/The Donut Plant, $300; credit Purchases, $300.

• debit Accounts Receivable/The Donut Plant, $300; credit Purchases, $300.

• debit Purchases, $300; credit Accounts Payable/The Donut Plant, $300.

• debit Purchases, $300; credit Accounts Receivable/The Donut Plant, $300.

Purchase Allowance Granted:

Marco discovered that the equipment had some damage but they still want it, the manufacture gave them $100 allowance on this purchase.

​To Record this Allowance Transaction:

DR Accounts Payable $1,00

CR Purchases Returns & Allowances $100

Discount Taken:

Terms: $30/10 Net/30 Journal Entry when take discount.

DR Account Payable $1,400

CR Purchase Discount $30

Multiple Choice

Mike's Music paid cash on account to Sheet Music Supply, $294, covering Purchase Invoice No. 54 for $300, less a 2% discount, $6. The journal entry for Mike's Music to record this transaction is:

• debit Accounts Payable/Sheet Music Supply, $294; credit Cash, $294.

• debit Accounts Payable/Sheet Music Supply, $300; credit Cash, $300.

• debit Accounts Payable/Sheet Music Supply, $300; credit Purchases Discount, $6, credit Cash, $294.

• debit Purchases Discount, $6, debit Cash, $294; credit Accounts Payable/Sheet Music Supply, $300.

Net Purchases

Purchase Discounts and Purchases Returns & Allowances are both contra-purchases accoutns and are subtracted to calculate net purchases.

​Purchases $1,500

Purchases Returns and Allowances $100

Purchase Discounts $30

Net Purchases $1,370