• Define the purpose of a purchase cash discount with an example (Learning Objective P1).
The concept of a cash discount refers to a certain predetermined deduction made to the total amount a buyer owes a seller that acts as an incentive to make payment before a certain designated timeframe. In more finite terms, a cash discount is a specific amount of monetary incentive offered to customers to primarily motivate them to make payments of amounts owed within a short period of time (Shah & Naik, 2019). Usually, it is either in fixed amounts set at a dollar amount or a certain percentage which, after the buyer makes payment is deductable. In recent years, its purpose has evolved to include attracting new customers for new enterprises. Traditionally, cash discounts have been christened “early payment discounts” that clients are entitled to if they make a payment to a certain good or service within a given timeframe. In turn, the technique ensures that companies have an ability to grow faster. For example, a wholesaler adopts a policy of offering a 2 % discount to all invoices cleared within a month. So, in such a case, total invoice calculated on payment is minus 2 % of the total value of the invoice.
• Describe the definition and purpose of purchases with returns and allowances with examples (Learning Objective) P1.
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Purchases with returns and allowances is a contra account maintained in the balance sheet that contains all the deductions that are made for the returned items to suppliers and the allowances agreed upon for all the items returnable but not returned to the supplier (Yulia & Rustam, 2016) . The allowances usually are provided for when the goods or services received are not satisfactorily or per the preset standards agreed upon by the seller and buyer. The contra account takes into account both the purchases with returns and the allowances allowed by the seller to the buyer for goods and services returned and those retained by the buyer though they are not satisfactory to the buyer. For example, the purchase of return happens when a certain inventory after purchase is returned to the supplier and subsequently captured in the final balance of the purchases. For instance an item bought for $ 1400, when returned is recorded for the same account in the purchases with returns account. In same way, if the customer opted to retain the good, they enjoy an allowance predetermined by the supplier for example $ 300. Thus, in the purchase returns and allowance account a $300 item purchase return allowance is entered in the account.
References
Yulia, P., & Rustam, S. (2016). Simulation modelling of supply chain with allowance of reliability. Russian Journal of Logistics & Transport Management, (2 (3)).
Shah, N., & Naik, M. (2019). Optimal replenishment and pricing policies for deteriorating items with quadratic demand under trade credit, quantity discounts and cash discounts. Uncertain Supply Chain Management, 7(3), 439-456.
