Share
Explore BrainMass

Purchases

Net purchases is found by subtracting the credit balances in the purchases returns and allowances and purchases discounts account from the debt balance in the purchases account. The cost of goods purchased equals net purchases plus the freight-in account’s debit balance.

Under the periodic system, an purchases expense account is used to record the purchase of goods, merchandise or materials intended to be consumed or sold in the ordinary course of business.



Freight-In

Freight terms indicate who pays the shipping fees. Freight-on-board (FOB) shipping point means the buyer pays the shipping fees and receives title of goods at the point they are shipped; FOB destination means that the seller retains title of the goods until they land at their destination, and the seller pays the shipping fees.

Returns and Allowances

As a buyer, you have the right to inspect goods and ensure that they conform to expectations. Buys may reject non-conforming goods. When this happens, the buyr prepares a debit memorandum that identifies the goods in qquestion and the costs of those items. This information is used to inform the seller about the return of the goods. It is also used to inform the accounting department tto prepare ajournal entry that decreased (debits) accounts payable and increases (credits) and account names purchase returns and allowances. The account purchase returns and allowances is a contra-expense account. When the income statement is prepared, purchase returns and allowances are subtracted from the value of the purchases account to get net purchases. 

Purchase Discounts

Many sellers offer their credit customers sales discounts when they receive early payment. For example, a credit sale may have terms 2/10, net 20, meaning a two percent discount is available if the balance of the invoice is paid within ten days, and the total value of the invoice is due within 30 days. Companies that take advantage of sales discounts usually record them in a contra-expense account named purchase discounts. Purchase discounts are subtracted from purchases to get net purchases.