Accounting for Purchase Discounts, Returns and Allowances
Purchase Discounts, Returns and Allowances are contra expense accounts with a credit balance, which are used to offset the Purchase expense account that normally carries a debit balance in order to report the net value of purchases made by a business in an accounting period on its income statement.
Another example of contra expense accounts are Reimbursable Expenses
Purchase Discounts is a contra expense account with a credit balance that records the value of purchase cost deductions granted by a seller if a buyer makes a payment within an allowable time period, used as an incentive to encourage prompt payment of invoices.
Purchase discounts are also interchangeably referred to as:
A common example of a purchase discount are the NET D payment terms, such as 2/10 Net 30, where a buyer receives a 2% discount if an invoice is paid early within 10 days, otherwise a full payment is due in 30 days.
Find out how purchase discounts differ from trade discounts.
Purchase Returns, or Returns Outwards, is a contra expense account with a credit balance used by a buyer to record the value of previously purchased goods returned to a seller due to being damaged, defective, or otherwise undesirable.
Purchase Allowances is a contra expense account with a credit balance that records the value of purchase cost deductions granted by a seller in exchange for a buyer retaining damaged, incorrect or otherwise faulty goods instead of returning them to the seller.
Purchase Discounts, Returns and Allowances are contra expense accounts that carry a credit balance, which is contrary to the normal debit balance of regular expense accounts.
In the accounting general ledger, the credit balances of the contra purchase expense accounts reduce and offset the usual debit balances reported in the standard purchase expense accounts.
| Debit or Credit? – Purchase Returns, Discounts and Allowances [Contra Expense Accounts] | |||
|---|---|---|---|
| Account Name | Account Type | Debit | Credit |
| Purchases | Parent expense account | Increase | Decrease |
| Purchase Discounts, Returns and Allowances | Contra expense account | Decrease | Increase |
When a seller grants a discount, refund or an allowance to a buyer, the buyer will credit the respective Purchase Discounts, Returns or Allowances contra-expense account and debit the same amount to an Accounts Payable liability account or a Bank asset account in case of a payment refund.
A buyer debits Accounts Payable if the original purchase was made on credit and the payment has not yet been made to a seller.
This is because the initial journal posting at the time purchase was a debit to Purchase Expenses and a credit to the Accounts Payable liability account.
| Discounts, Returns and Allowances on Credit Purchases | ||||
|---|---|---|---|---|
| Account Name | Account Type | Financial Statement | Debit | Credit |
| Accounts Payable | Liability | Balance Sheet | $$$ | |
| Purchase Discounts, Returns and Allowances | Contra Expense | Income Statement | $$$ | |
A buyer debits Cash in Bank if a purchase return or allowance involves a refund of a payment that the buyer has already made to a seller.
| Cash Refunds for Purchase Returns and Allowances | ||||
|---|---|---|---|---|
| Account Name | Account Type | Financial Statement | Debit | Credit |
| Cash in Bank | Asset | Balance Sheet | $$$ | |
| Purchase Returns and Allowances | Contra Expense | Income Statement | $$$ | |
Contra accounts for purchase expenses like Purchase Discounts, Returns and Allowances are presented in the income statement as a deduction from the gross Purchases made by a business in an accounting period, which results in the net Purchase Expense after discounts, returns and allowances.
Purchase Discounts, Returns, Allowances and other contra expense accounts may be presented on the income statement as individual line items or aggregated into a single contra-expense line if immaterial or preferable.
| Income Statement >>> Purchase Expenses | ||
|---|---|---|
| Purchases - Gross | Expense | $100,000 |
| (Less: Purchase Discounts) | (Contra Expense) | ($15,000) |
| (Less: Purchase Returns) | (Contra Expense) | ($10,000) |
| (Less: Purchase Allowances) | (Contra Expense) | ($5,000) |
| Purchases - Net | Net Balance (= Expense - Contra) | $70,000 |
| Income Statement >>> Purchase Expenses [Aggregated] | ||
|---|---|---|
| Purchases - Gross | Expense | $100,000 |
| (Less: Purchase Returns, Discounts and Allowances) | (Contra Expense) | ($5,000) |
| Purchases - Net | Net Balance (= Expense - Contra) | $95,000 |
The net balance of Purchase Expenses on an income statement is calculated as the difference between a company’s gross purchases and all associated contra expenses like Purchase Returns, Allowances and Discounts.
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