Small Business UK | Guides & Tips

A sales return and allowance on the seller’s books is recorded as a purchase return and allowance on the books of the purchaser. The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. A debit memorandum is a document issued by a buyer to inform a seller that a debit has been made to the seller’s account. The original copy of the memorandum is sent to the seller and one copy is retained by the purchaser. The information contained in a debit memorandum is similar to the information found in the credit memorandum in Illustration 5-4 (p. 184). The entry by Chelsea Video for the merchandise returned on May 8 is:

Purchase Returns and Allowances represent a reduction in the cost of goods purchased for resale. It is a contra account to Purchases and its normal balance is a credit. The contra account is used instead of crediting Purchases in order to disclose both the dollar amount of returns and allowances and the percentage of gross purchases that have proven to be unsatisfactory. Excessive purchase returns and allowances may indicate inefficiencies in a company’s purchasing procedures or the need to find more reliable suppliers.
Credit memorandums and debit memorandums derive their names from the action that the issuer takes on the accounts receivable or payable carried on its books. The purchaser sends a debit memorandum to indicate a debit to Accounts Payable and a credit to Purchase Returns and Allowances. Similarly, a seller issues a credit memorandum to indicate a credit to Accounts Receivable and a debit to Sales Returns and Allowances.
Purchase Discounts
Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. The buyer calls this discount a purchase discount. Like a sales discount, a purchase discount is based on the invoice cost less returns and allowances, if any. Purchase Discounts is credited for discounts that are taken

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