Under the periodic inventory system (covered fully in the next topic), a merchandiser does not debit Merchandise Inventory every time it buys goods. Instead it debits a temporary account called Purchases — the account where the cost of merchandise purchased for resale is recorded. Purchases behaves like an expense for the purpose of debits and credits (debit to increase), but it is really the raw material of Cost of Goods Sold, not an operating expense.
Purchases Returns and Allowances
Sometimes goods arrive damaged, are the wrong size, or simply do not sell. Purchases Returns and Allowances is an account used by the buyer to record the return of goods (a return sends the goods back for full credit; an allowance keeps the goods but accepts a price reduction, e.g., for minor damage). It is a contra account to Purchases — it carries a credit balance and is subtracted from Purchases when Net Purchases is calculated. The seller issues a credit invoice authorizing the reduction, which the buyer uses as the source document for the entry.
Purchase discounts and credit terms
Suppliers often offer a cash discount to encourage early payment. Terms are written in shorthand such as "2/10, n/30": the buyer earns a 2% discount if the invoice is paid within 10 days of the invoice date; otherwise the full (net) amount is due within 30 days. If the discount is taken, the buyer debits Accounts Payable for the full amount owed, credits Cash for the reduced amount actually paid, and credits Purchases Discounts for the difference. Discounts are always calculated on the balance still owed — after any returns or allowances have already reduced it.
| Notation | Meaning |
|---|---|
| 2/10, n/30 | 2% discount if paid within 10 days; full (net) amount due in 30 days |
| 1/15, n/60 | 1% discount if paid within 15 days; full amount due in 60 days |
| n/30 | No discount offered; full amount due in 30 days |
Transportation-in
Transportation-in is the account used to record the transportation charges on merchandise purchased — freight the buyer pays to get goods delivered. Unlike Purchases Returns and Allowances and Purchases Discounts, Transportation-in is added to Purchases (not subtracted) because freight is part of the true cost of getting merchandise ready to sell.