Point 10 Purchase Returns & Allowances, Discounts Seller’s responsibility :  damaged,  defective,  of inferior quality,  not meet buyer’s specifications Purchase Returns & Allowances Dr. Cash/Accounts Payable Cr. Merchandise Inventory Note: All of this is because of seller’s mistakes.

● Assume that Chelsea Video returned goods costing $300 to Highpoint Electronic on May 9. The entry is as follows: The entry is to adjust the AMOUNT of the inventory

Discounts Reduction in selling price due to the volume of goods purchased Purchase is recorded at reduced price. Quantity discount Purchase discount Discount offered for early payment of bill The purchase entry is according to three discount rates. Trade discount cash discount Note: All of this is because of buyer’s active action.

Credit terms 2/10 This means that a 2% cash discount may be taken if payment is made within 10 days (the discount period). 1/20 This means that a 1% cash discount may be taken if payment is made within days. n/30 The invoice price, less any returns or allowances, is due 30 days. The net amount must be paid in days.

Dr. Accounts Payable Cr. Merchandise Inventory ② Cr. Cash In contrast to quantity discounts, purchase discounts are recorded separately. Entry is made when payment is made.

● To illustrate, assume that Chelsea Video pays the balance of $3,500 on May 14, the last day of the discount period.

So Chelsea Video's entry is:  The discount is $70 ($3,500 × 2%), and the amount of cash paid is $3,430 ($3,500 − $70).

●If Chelsea Video did not take advantage of the purchase discount and instead made full payment of $3,500 on June 3, the journal entry would be:

Illustration  On September 4, New Idea Company buys merchandise on account from Junol Company for $1,500, terms 2/10, n/30, FOB shipping point. GST rate is 5%.  The correct company pays freight charges of $75 on September 5.  On September 8, New Idea Company returns $200 of the merchandise to Junol Company.  On September 14, New Idea Company pays the total amount owing. Dr. Merchandise Inventory 1,500 Dr. GST Recoverable (1500×5%) 75 Cr. Accounts Payable 1,575 Dr. Merchandise Inventory 75 Cr. Cash 75 Dr. Accounts Payable 200 Cr. Merchandise Inventory 200 Dr. Accounts Payable (1,575 − $200) 1,375 Cr. Merchandise Inventory (1,375 × 2%) 27.5 Cr. Cash (1,375 − 27.5 ) 1,347.5

1. Purchase of goods Dr. Merchandise Inventory Cr. Cash or A/P 2. Freight on purchases (shipping point – Buyer pays freight) Dr. Merchandise Inventory Cr. Cash or A/P 3. Purchase Tax Dr. GST recoverable Cr. Cash or A/P 4. Return of purchased goods Dr. Cash or A/P Cr. Merchandise Inventory 5. Payment on account with a discount Dr. Accounts Payable Cr. Merchandise Inventory Cr. Cash Summary of Purchase Transactions Purchases PERPETUAL