What is a purchase allowance?

A purchase allowance is a reduction in the buyer's cost of merchandise that it had purchased. The purchase allowance is granted by the supplier because of a problem such as shipping the wrong items, the incorrect quantity, flaws in the goods, etc. In the case of a purchase allowance, the buyer does not return the merchandise to the supplier.

Under a periodic inventory system, the buyer will record the purchase allowance with 1) a credit to the account Purchase Allowances or to the account Purchase Returns and Allowances, and 2) a debit to Accounts Payable. (The supplier will record the allowance with a debit to Sales Allowances and a credit to Accounts Receivable.)

The buyer will offset the debit balance in its Purchases account with the credit balance in Purchase Allowances as part of its computation of net purchases.

Free Debits and Credits Cheat Sheet

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