Understating And Overstating Purchase Allowances
As Purchase Allowance is a deduction from the Gross or Total Purchases , so understating purchases allowance means that we less deducted it from total purchases. So, we need it to add more purchases allowances to deduct it from total purchases. In case of overstating purchase allowance, it decreases the amount of total purchases, so we need to add back overstated value in total purchases. Due to Overstating or Overcasting of Purchases Allowance, the N et Income will decrease and hence as a result the company earns less reve nues w hile i n case of Understating or Undercasting of Purchases Allowance, the net income will increase, so the company ear ns more reve nue t ha n t he actual o ne.