Perpetual Inventory:Purchase Allowance

Brian Krogol
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Alright now let's try this with the purchase allowance. So a purchase allowance. This is where we're gonna keep the goods, we're still gonna keep them, we're not gonna return them to the supplier but we're gonna get a better price. Right? Maybe they were low quality goods and we want a better price. So let's check out the example. T. O. S. Ordered 500 things on account at $5 per thing. When low quality things arrived the supplier agreed to lower the price to $2 per thing. Okay so instead of paying $5 per thing, we're now gonna pay $2 per thing. Alright so we would still be making that first entry just like we did above when we bought the 500 things, we would have made some sort of entry like inventory and uh accounts payable. Right? We would debit inventory and credit accounts payable and that was the $500. Excuse me? 500 things at $5. Well we would have made an entry to increase our inventory to 2500 and we would owe our supplier 2500. Right? That's the credit to accounts payable. But now our supplier said okay they are low quality things. So I'm gonna give you a discount down to $2. Right? So we need to lower the value of our inventory. Our inventory should be valued at $2. So it's 500 times the $2. Well that's 1000. Right? Our inventory should be valued at 1000 but it's right now valued at 2500. So we need to decrease inventory by 1500. Right? Because it's at 2500 and we want to get to 1000. So we're gonna make a second entry here for the purchase purchase allowance where we're going to debit our accounts payable right? Because we're no longer gonna owe them so much money, we don't owe them 2500. We're only going to show them the 1000 at this lower price. So we have to debit accounts payable by 1500 and credit inventory by 1500. Right? So by making this second entry it's bringing our inventory down to the $1000 value which is the 500 things at $2 per and our accounts payable down to the $1000 value, the amount that we owe to our supplier. Right. So we saw that our inventory went up 2500. Right? But then our inventory in the second entry went down 1500 that gets us to the inventory balance of 1000 and the same thing's happening in the liabilities where a P. R. Accounts payable went up by 2500 in the first entry and then down by 1502 are correct amount of 1000 at the new price of $2. Cool. So that's a purchase allowance, notice that in a purchase allowance it's because of some situation where we're still gonna keep the goods but we want a better price for the goods. All right, So let's go ahead and pause here and then move on to the next video.