Merchandising: Purchase Discounts, Purchase Returns, Purchase Allowances – Accounting video

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.

10 thoughts on “Merchandising: Purchase Discounts, Purchase Returns, Purchase Allowances – Accounting video

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

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

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