Purchase returns and allowances affect financial statements by doing what?

Purchase returns and allowances affect financial statements by doing what?

• A. Increases purchases
• B. Increases Accounts Payable
• C. Reduces purchases (or inventory in perpetual) and lowers Accounts Payable
• D. Has no effect on net purchases

Answer: (C)

Purchase returns and allowances reduce the cost of purchases and the amount owed to suppliers. When you return goods, you’re reversing part of the recorded purchase, which in a periodic system lowers purchases (and, in a perpetual system, lowers the inventory directly). At the same time, you no longer owe the supplier for those returned items, so Accounts Payable decreases. Net purchases for the period are smaller because returns (and allowances) are subtracted from purchases. Therefore, the effect is a reduction in purchases (or inventory, in a perpetual system) and a reduction in Accounts Payable.

Purchase returns and allowances reduce the cost of purchases and the amount owed to suppliers. When you return goods, you’re reversing part of the recorded purchase, which in a periodic system lowers purchases (and, in a perpetual system, lowers the inventory directly). At the same time, you no longer owe the supplier for those returned items, so Accounts Payable decreases. Net purchases for the period are smaller because returns (and allowances) are subtracted from purchases. Therefore, the effect is a reduction in purchases (or inventory, in a perpetual system) and a reduction in Accounts Payable.