What is Purchase Allowance - Definition - Meaning - Explanation

Purchase Allowance Contra Expense Accounting | Purchases Allowances Journal Entry

Purchase Allowance is the reduction of Purchase Price given by Seller (Supplier) to Buyer (Accounts Payable) when the purchaser agrees to retain the goods that have some minor defects or having below Standard quality. The buyer needs that goods so much and accept the offer of the seller at a lower standard price. It is also known as Purchase Allowance Contra Expense Account as it is deducted from Total Purchases on Income Statement or Profit And Loss Account at the end of accounting period.

You Can Also Read Out, “What Are Sales Allowances”

Purchase Allowance has no balance so it is closed by transferring it to the Income Statement / Statement or Comprehensive Income at the end of an Accounting Period. However, Rules of Debit And Credit For Expenses is also the same and applicable for Purchase Allowance i.e., when it increases we debit it and when it decreases, we credit it.

Example:

Suppose, Mr. A purchased 5 Chairs from Mr. B worth Rs. 50000 (Each Rs. 10000). Mr. A finds that one chair has defect, i.e., One Leg of Chair has not level with others on ground, etc. then he would be willing to return the goods but on the offer of Mr. B that he is ready to lower the price, Mr. A retained the chair.

Following is the Purchase Allowance Journal Entry in the Book of Mr. A’s Business:

                                 Accounts Payable / Creditor a/c      9800

                                                                                  Purchase Allowance a/c    9800

(2% Purchase Allowance is Received on 1 Chair)

Here Purchase Allowance = Cost of One Chair X Rate = 10000 X 2% = 200

Purchase Allowance is a revenue for buyer as it decreases the amount of Purchases. Moreover, we debit it when it incurs and credit it when it is closed at the end of accounting period.