What is a Purchase Allowance?

A purchase allowance is a reduction in the list price offered by a manufacturer or distributor, in exchange for ordering a minimum quantity. This allowance may also be granted to a customer in exchange for the buyer’s retention of damaged or incorrect goods. Purchase allowances are more common when customers have formal purchasing functions; the purchasing staff can then negotiate for purchase allowances with suppliers.

Accounting for a Purchase Allowance

When a supplier grants a purchase allowance, the buyer records the amount of the allowance as a debit to accounts payable and a credit to inventory. The seller records the allowance in the sales allowances account; this is a contra revenue account that is paired with and offsets gross sales. The seller also records a reduction in its accounts receivable account via a credit memo, thereby reducing the receivable expected from the buyer.

Purchase Allowance Fraud

Purchase allowance fraud typically involves schemes where individuals or entities manipulate processes to gain unauthorized financial benefits related to discounts, rebates, or allowances on purchases. Here are the main types:

Fictitious purchases. This is a claim for an allowance or rebate for purchases that never occurred. It may involve creating fake invoices or purchase orders.
Duplicate claims. This is the submission of the same purchase allowance claim multiple times to collect extra payments. It may be achieved by altering or duplicating receipts or documentation.
Overstatement of purchase volume. This is the inflation of the reported volume of purchases to qualify for higher allowances or rebates. It may involve collusion with suppliers to falsify records.
Unauthorized allowance claims. This is the request for an allowance for purchases that do not qualify under the agreed terms. It exploits vague or poorly monitored policies.
Kickbacks and collusion. Employees or agents collude with suppliers or intermediaries to approve fraudulent claims in exchange for personal gains. Kickbacks are paid as part of this arrangement.
Alteration of documentation. This is the modification of receipts, invoices, or contracts to reflect higher eligible amounts for allowances.
Phantom suppliers. This is the creation of fake suppliers to process non-existent purchases and claim related allowances.
False return claims. This is the reporting of returns or exchanges that never happened to recoup additional allowances. It often involves forged return documentation.
Timing manipulation. This is the manipulation of the dates of purchases to take advantage of expired or forthcoming allowance programs. It may involve backdating or pre-dating documentation.

These types of fraud can severely impact businesses' financial integrity and often require robust auditing and monitoring systems to detect and prevent.