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 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.