Returns and Allowances

Returns and Allowances - allowances account is subtracted...

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Returns and Allowances When a purchaser receives defective, damaged, or otherwise undesirable merchandise, the  purchaser prepares a  debit memorandum  that identifies the items in question and the cost of those  items. The purchaser uses the debit memorandum to inform the seller about the return and to  prepare a journal entry that decreases (debits) accounts payable and increases (credits) an account  named  purchases returns and allowances , which is a contra-expense account. Contra-expense  accounts normally have credit balances. On the income statement, the purchases returns and 
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Unformatted text preview: allowances account is subtracted from purchases. If Music World discovers $100 worth of defective merchandise in the shipment from Music Suppliers, Inc., Music World prepares a debit memorandum, returns the merchandise, and makes a journal entry that decreases (debits) accounts payable for $100 and that increases (credits) purchases returns and allowances for $100. For reference purposes, the journal entry's description may include the debit memorandum number and the seller's invoice number....
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