Purchase Returns & Discounts Question

accounting studentQ: If I bought 3 units of merchandise on account and returned 1 due to defects, and was given a credit memo, what would the entry be?

Debit: Credit Memo xxx
Credit: Purchase Returns & Discounts xxx


Debit: Accounts Payable xxx
Credit: Purchase Returns & Discounts xxx

Would appreciate your help. Thanks.

For anyone wondering, a credit memo is a credit note, which is defined by the Free Dictionary as "a commercial document issued by a seller to a buyer, listing the products, quantities and agreed prices for products or services the seller provided the buyer, but the buyer did not receive or returned. It may be issued in the case of damaged goods, errors or allowances..."

The second option above is correct.

Let's rewind first. Originally when purchasing the goods we would have done:
Debit: Purchases xxx
Credit: Accounts Payable (liability) xxx

When credit memo is received we would do the following entry:
Debit: Accounts Payable (liability) xxx
Credit: Purchase Returns & Discounts xxx

You could debit "Creditors" instead of "Accounts Payable" above if you want.

Why debit accounts payable? It is a liability and we owe them less (we do not owe them for the defective goods).

Why credit discount received? It's income. We saved money. We owe that much less. So it's considered income.

When we pay the creditor for the remaining 2 goods we do the usual:

Debit: Accounts Payable (liability) xxx
Credit: Bank (asset) xxx

Hope that makes sense.


P.S. There is a lot more info on purchases returns and discounts in my
basic accounting book. ;-)

Comments for Purchase Returns & Discounts Question

Click here to add your own comments

Clarification of Purchase Return
by: Borhan

Thanks for clarifying the transaction entries for Purchase Return.

You're welcome!

Click here to add your own comments

Return to Ask a Question About This Lesson!.

Enjoying this Website?
Help Support it with a Donation


Advertise on Accounting-Basics-for-Students.com