This is Part Two in our Merchandising

Operation series where we’ll be discussing, or looking at a purchase

discounts example, and a purchase returns and allowances example. The first one

we’ll look at is a purchases discounts example. Suppose the GAAP store purchased T-shirts on account for $10,000. Credit terms are 2/10 net 30 and GAAP

paid within the discount period. The first step is to generalize the purchase

of inventory. So this should be more of a review. This first entry here. When we

purchase inventory, our inventories increasing, and inventories and asset

therefore, we debit our inventory for the amount of $10,000 in this case. It also

states that we’re purchasing these T-shirts on account. So we owe the money;

we’ll pay it later, and that’s a credit to accounts payable for the $10,000. And

our description for this entry would be purchase inventory on account, and then

of course after our journal entry we would want to post it to our ledger. So

here’s our inventory T- Account. We debited inventory. We increased it,

therefore, we debit inventory in the ledger as well. So now generalize the

payment on account. Well we have to think about this for a second. We owe $10,000

but it said we’re paying it within the discount period. So obviously we’re

taking our discount, in this case, it’s 2% of the amount we owe. We owe

$10,000, so 2% of that would be a $200 discount.

However, on the books, we have an accounts payable of $10,000. That we owe $10,000

for these t-shirts, but we’re only going to pay $9800 for

these t-shirts because we’re taking our 2% discount. So what do we debit

accounts payable for? Good we need to take it completely off

the books. The books show that we have a $10,000

debt. If we debit accounts payable for only $9800, then the books

would show we still owe $200. And that’s not true. So we need

to wipe off this debt by debiting accounts payable for the full $10,000. As stated before , we’re only going to pay

$9800 in cash because we’re taking a $200 discount. But what’s the other account that needs to get credited here?

Keep in mind there’s no such account called purchase discounts or purchase

returns allowances. Because remember we keep our inventory on the books at what

we paid for it. So we need to reduce the value of our inventory here, so we’re

going to credit our inventory for the $200. And our description

would be to record payment of inventory on account within the discount period,

and again your description could be much shorter, it could be different depending

on the person writing it. Now we need to post our entry. In this case, I’m only

going to post inventory, as that’s the only T-Account I have. So I’m going to

post the $200 to the inventory count to show that I have

$9800 worth of inventory because that is what I paid

for that inventory. Now let’s look at a purchase returns and allowances example.

Suppose We Sell Broken Toys buys a $100,000 worth of Lego

toys on credit terms of 3/15 n/45. Some of the goods are

damaged in shipment, so We Sell Broken Toys returns $10,000 of the

merchandise to Lego. Record the purchase and the return. And this case you can

omit your descriptions for your entries. So the first thing we want to do is to

record the purchase. Let’s say that the purchase was on May 6th. So when we

record the purchase again we’re debiting our inventory for the $100,000 and we’re crediting our accounts payable for

the $100,000. So let’s go ahead and set up our T-Accounts for both. I debited

inventory for the $100,000, so I will post that to the ledger, and I credit accounts

payable for a $100,000 and I’ll post that to the ledger. Now we need to

record the return. We’re returning $10,000 worth of merchandise.

Let’s say that we returned that on the 13th. So I no longer owe $10,000 worth of or in the liability. So I take away $10,000 from the liability

accounts payable by debiting it and I no longer have $10,000 worth

of inventory. So I have to take it out of inventory with a credit and we’ll post

this journal entry to the ledger. So now I have inventory valued at $90,000

and I also owe $90,000. Now in this scenario I have two

different options for pay. I could pay within the next 15 days from May the

6th, and take a 3% discount on what I owe, or I could pay after the

discount period of 15 days and pay within 45 days and pay the total owed of

$90,000. So let’s take a look at both. So remember the purchase

was made on May the 6th. So how much must We Sell Broken Toys pay Lego if

paid on May the 22nd? Well 15 days is our discount period, and if we purchase them

on May the 6th then the last day of the discount period would be the 21st. So we

are not paying within the discount period here, therefore, we need to pay the

entire amount owed. So looking at our T- Accounts here we see that we own $90,000.

So we’ll need to debit accounts payable for the $90,000, and of course we’re

paying cash, so will credit cash for $90,000. Now let’s say that we paid on

May the 20th. That is paying within the discount period, and again our accounts

payable shows we owe $90,000. But we’re paying within the discount period so

we’re going to take the discount of 3%. So there’s a couple ways you can

calculate the discount or how much you’re actually going to pay. So let’s do

that first. The first one here is the discount

amount. So we take the amount we owe, not the amount of the original purchase only

the amount that you actually owe at this point. Remember we returned $10,000, so we only owe $90,000 at this point times the discount of 3%, gives me a $2,700 discount. Or I can

calculate the amount of cash I’m going to pay by taking $90,000 times

97%, which is what I’m going to pay, because I’m taking a 3% discount. So that means I’m going to pay in cash $87,300, that’s what I owe. So I’m going to debit my accounts

payable just as before for the entire amount that I owe which is $90,000.Because I got to get that off the books because I no longer

oh the Lego money. So I’ve got to get it off the books. Then I will credit cash for the $87,300. What about the discount? Remember that’s a reduction

of your inventory, so we credit our inventory for $2,700. So let’s post that

to the inventory account to show my new balance in inventory. So my new balance

in inventory would be $87,300 because that’s what I actually paid for the inventory that’s

in the account. And obviously my accounts payable at this point, I would debit, I

would post the debit to my T- Account and my new balance accounts payable with

these zero.

I am glad that you found my accounting video on purchase discount, returns and allowances to be helpful. Are there any other topics that you would find helpful to be posted? If you ever have specific questions I would be more than happy to try and help.

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We Sell Broken Toys makes a return due to damaged goods? Great example…

It is a great help for my financial accounting studying~~Thank u!!!

it is great! easy to be understant.. Welldone!

thanks for this! Understood it better than my prof

Whats the intro song? Great video btw

Amazing explanation. Very helpful video.

thank u!

thank you. I really need your help with accounting, how can I get videos your videos .it is really helpful.

Thank you so much! Easily one of the best tutorials I've seen so far!