What are the Special Transactions in

Inventory?
Below we are going to discuss how to create journal entries for the following
special transactions:

 Returns
 Discounts
 Allowances
 Transportation Costs

How these transactions are handling is unique for the purchaser and the
seller. We address each side of the transaction below. 

Special Transactions for the Purchaser

How to Account for Purchase Returns and Sales?

A return is something a buyer purchases and takes back. If we purchase some

inventory and something goes wrong - we need to return it. 

The effects of the return is the opposite of the original purchase transaction. If
we purchase it one way and we put it in our books as a journal entry one way;
then, if we return it , it's going to be the opposite. The debit become a credit
the credit becomes a debit. 

For example, when inventory is purchased the merchandise inventory account

is debited - meaning our inventory goes up. Our cash goes down so it's
credited. 

If we returned, Cash or Accounts Payable (depending on how you paid for it)
is going to be the debit - because it goes back up. Then merchandise
inventory is going to be the credit, because it goes down. 

Accounting for Inventory Allowances

Allowances is when the company allows you to keep the inventory at a

discount or without paying for it. I'm not returning the inventory; rather, the
company simply refunds part or all of the purchase amount. 
To record this, the journal entry would still be the same. It's not going to
change because we don't care about the physical inventory, we care about
the value of the inventory. We're still losing the value of the inventory, and
we're getting it off of our accounts payable or our cash.

So, our Cash (goes up) or our Accounts Payable (goes down) will be debited
by the amount of the allowance. Our inventory will be credited for the value of
the allowance. 

Accounting for a Purchase Discount? 

A purchase discount is a cash discount applied to a purchase. There are

different types of discounts: 

 Customer discount - A customer discount is a sale price on items. The store is

incentivizing you to buy. If you buy it, you get a discount off the normal full price. For the
purchaser, the discount is taken off at the time of purchase, so you're not really going to
see it in the journal entries.
 Trade discount - A trade discount is a little bit different. If you purchase a higher
quantity of an item, you get a discount price per item on the bulk sale. This is primarily
targeting resellers (distributors or retailers) of the item. The seller is again incentivizing
you to purchase a larger quantity. Again, the amount of discount will generally not
appear in the journal entries. 
 Cash discount - A cash discount incentivizes the customers to pay earlier. This one
only happens when you're paying on account. As the Buyer, you are using your
Accounts Payable. The seller provides you with. terms like, 2/10, net 30. This means
that you get a 2% discount if you pay within 10 days. If no, the full payment is due within
30 days. 

For the purchaser, if you pay during the discount period, the inventory account
is decreased by the discount amount. 

The first things, I'm going to debit the entire amount of accounts payable for
the entire amount of the invoice without the discount. 

Next, I'm going to credit Cash for the payable amount minus the discount
amount (the amount that I'm actually paying). 

Remember, our debits and our credits have to equal. Right now, they're not
because the accounts payable is a certain amount and the cash is that
amount minus the discount. 
The third thing that I have to do is credit inventory. I'm lowering the value of
my inventory by whatever that discounted amount is. This will balance the
debits and credits. 

Remember, the inventory account is the purchase value of all inventory. It

does not means the actual or retail value of it. 

Accounting for Transportation Cost

The responsible party or the paying party if you're the responsible then you
are the one paying of the freight cost. 

From the buyer's side, if the risk is of loss during transit (that is the point of
shipment) is assumed by the buyer it's called FOB (Free-On-Board) Shipping
Point. If the Buyer does not assume responsibility until delivery, then it is
called FOB Destination. 

The purchaser would take that cost of shipment and put it into our inventory
because that is part of the cost of the inventory to get it to our facility. 

We would credit Cash and debit Inventory. 

What are the Special Transactions for

the Seller of Inventory?
The special transactions that happen with the sale of inventory to customers
include:

 Cost of Transportation
 Returns, and
 Allowances

Each is discussed below.