Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 225

Purchase Discounts

As we mentioned in our discussion of sales transactions, a seller may offer the buyer

credit terms that include a discount for early payment. The buyer refers to such dis-

counts as purchases discounts, which reduce the cost of merchandise purchased. Under

the perpetual inventory system, the buyer initially debits the merchandise inventory

account for the amount of the invoice. When paying the invoice, the buyer credits the

merchandise inventory account for the amount of the discount. In this way, the mer-

chandise inventory shows the netcost to the buyer.

To illustrate, assume that Online Solutions purchased the $1,800 merchandise from

Smith Corporation in the preceding entry on January 6 under the terms 1/15, n/30.

The entry to record the payment within the discount period is as follows:

If Online Solutions does not pay within the discount period, the entry to record the

payment is as follows:

Purchases Returns and Allowances

When merchandise is returned (purchase return) or a price adjustment is requested (pur-

chase allowance), the buyer (debtor) usually sends the seller a letter or a debit memo-

randum. A debit memoranduminforms the seller of the amount the buyer proposes

todebitto the account payable due the seller. It also states the reasons for the return or

the request for a price reduction.

The buyer may use a copy of the debit memorandum as the basis for recording the

return or allowance or wait for approval from the seller (creditor). To illustrate, assume

that on January 22 Online Solutions returns $5,000 of merchandise purchased from

Quantum Inc. and issues an accompanying debit memorandum. The return is recorded

as follows:

Purchases of merchandise on account are recorded as follows:

Jan. 21 Accounts Payable—Smith Corporation 1,800

Merchandise Inventory 18

Cash 1,782

Feb. 5 Accounts Payable—Smith Corporation 1,800

Cash 1,800

Jan. 6 Merchandise Inventory 1,800

Accounts Payable—Smith Corporation 1,800

SCF BS IS

OT ATLT —

SCF BS IS

OT ATLT —

SCF BS IS

—AcLc —

Jan. 22 Accounts Payable—Quantum Inc. 5,000

Merchandise Inventory 5,000

SCF BS IS

—ATLT —

When a buyer returns merchandise or has been granted an allowance prior to pay-

ing the invoice, the amount of the debit memorandum is deducted from the invoice