What are purchase returns and allowances?

Purchase returns and allowances refer to a reduction in the amount owed to a supplier when goods that were previously purchased are returned due to various reasons such as damage or shortages. The concept captures both the return of physical goods (purchase returns) and the allowances which may be granted by the supplier in the form of credits to your account for either shortages or the unsatisfactory condition of the received goods (allowances).

In this context, credits received for shortages or damaged goods play a vital role in inventory management and accounting, as they help businesses maintain accurate financial records and assess the quality of their suppliers. By obtaining these credits, a business effectively reduces its costs, as it does not have to pay for items that are defective or not received in full.

Other options represent different financial concepts that do not accurately describe the essence of purchase returns and allowances. For instance, payments made to suppliers for returned goods do not encompass the idea of receiving credits back against previous invoices. Discounts offered on future purchases and rewards for early payment of invoices refer to incentives given to customers and do not relate to the return of purchased products or the allowances associated with them.