Purchase Adjustments and Freight

🔻 Purchase Allowance

📍 Example: Z-Mart received defective goods from the supplier Trex and negotiated a $30 allowance instead of returning the goods.

📘 Journal Entry:

Accounts Payable 30 Merchandise Inventory 30
Imagine you ordered 10 chairs, but one is wobbly. You decide to keep it, and the supplier gives you $30 off the bill. You don’t send it back, but you adjust the inventory’s value since it’s effectively cheaper now.

🔁 Purchase Return

📍 Example: Z-Mart bought $2,500 worth of goods. On June 5, they returned $500. Then, on June 11, they paid for the remaining $2,000, taking a 2% discount.

📘 Journal Entry (Return on June 5):

Accounts Payable 500 Merchandise Inventory 500

📘 Journal Entry (Payment on June 11):

Accounts Payable 2,000 Merchandise Inventory 40 Cash 1,960
It’s like returning one item from a big online order before paying. Then you pay the rest—early enough to get a discount.

🚚 Freight Costs and FOB Terms

🧭 FOB Shipping Point

Buyer pays for shipping
Ownership transfers when goods leave seller's warehouse.

📍 Example: $75 freight charge paid by Z-Mart

📘 Journal Entry:

Merchandise Inventory 75 Cash 75
You order supplies from a warehouse and pay for your own shipping—so that shipping adds to the cost of the goods (since you needed to pay that to get them into your store).

📊 Total (Net) Cost of Merchandise Purchases

This section summarizes all adjustments to figure out how much inventory really cost the company.

📘 Formula:

Invoice Cost - Discounts - Returns & Allowances + Freight-In = Net Cost of Merchandise Purchases

📍 Example:

Invoice cost $235,000 - Discounts (4,200) - Returns/Allowances (1,500) + Freight-In 2,200 ------------------------------------ Net Cost: $231,500
Buying a car for $10,000 but getting a $500 rebate and spending $200 on delivery. The true cost to you is:
$10,000 - 500 + 200 = $9,700.
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