Difference Between Sales Returns and Purchase Return Journal Entries 2023 Top of IT

journal entry for purchase return

A sales return journal entry is an accounting transaction that records when a sales item is returned to the company. Businesses need to track when returned goods are counted as company revenue and expense. how to prepare a post closing trial balance To create a purchase return journal entry, you will first need to identify the merchandise that was returned. Next, you will need to record the credit that was given to you by the vendor or supplier.

The transactions of returning the goods purchased may be treated as an exact opposite of the transaction of purchase. Note that we are for now considering a return of goods in case of purchase made on credit only. Goods/Stock purchased or sold being returned is quite a common practice in business.

Costs incurred at the time of purchase/sale go waste

All such events related to returned goods are documented in the final accounts as they have a monetary impact. Depending on a transaction’s terms and conditions, goods purchased both in cash and credit may be returned. To illustrate, suppose that the Russell Company purchased 10 television sets for future resale at a total cost of $2,800. The periodic inventory system is used, and the payable amount is recorded at the gross or invoice price. If merchandise purchased are not received according to specifications or if they are defective, buyer can return them to the seller or ask the seller for an allowance (e.g., reduction in price). If goods are returned to a supplier, or if an invoice received from the supplier has an overcharge, a credit note would be sought to rectify the situation.

However, if the purchase was made in cash, it can be seen that Cash would have been debited (because the company would have received cash against the returned purchase material). Therefore, the supplier has to receive those goods back and make the subsequent entry in their accounts and ledgers to ensure that they can maximize the overall returns. When the returns are recorded by reversing the entries for the original transaction, no separate information would be available with regard to returns. Only the net information after setting off the returns would be revealed by the Purchases a/c and Sales a/c.

Purchase returns definition

Return outwards or purchase returns are shown in the trading account as an adjustment (reduction) from the total purchases for an accounting period. Any entry relating to the return of merchandise purchased for cash is recorded in a cash receipts journal. It is worth mentioning here that Debit Notes are issued after it has been agreed by the supplier. If the instances of returns are common in a business a separate journal/ book shall be kept to record such purchase returns.

On the other hand, it was also a probable expense that was likely to be incurred due to paying back for the goods and services the company had purchased. Purchase Returns Account is a contra-expense account; therefore, it can never have a debit balance. Purchase Returns or return outwards can be seen as a process where goods are returned to the supplier because of being defected or damaged. The organisation purchased goods from Mr. Ghavri on credit for 24,000.

Structure of a purchase returns journal

To understand this we will have to understand costs incurred in relation to transactions. This happens both in case of goods purchased as well as goods sold by the organisation. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. On 2 April 2016, Z Traders returned the full amount in cash to Y Merchants. Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. The treatment mentioned above is mainly for the scenario where the purchase had been made on credit.

journal entry for purchase return

The net result of these transactions would be a net sale of 17,000 to Ms. Sunanda. This can be reflected in our account books by recording the first transaction of a credit sale and then recording a reverse transaction at the time of goods being returned. The transactions of returning the goods either in case of purchase or in case of sale are exactly the reverse of the transactions of purchase and sale of goods. Thus, for these transactions of returns, reverse of the journal entries recorded at the time of making the purchase or sale as the case may be sounds rational or convenient. If goods purchased are found to be damaged, they may be returned to suppliers.

How to Control Sales Returns?

A purchase returns and allowances account is simply a virtual account that exists solely to show the net effect of all transactions relating to returns and allowances. It serves as a voucher for entries in the purchase returns and allowances journal. All credit notes received from the supplier are entered in the returns outward book. The entries are listed in more or less the same manner as invoices received are entered in the purchases book.

Merchandise that is returned to suppliers is known as returns outward. If merchandise purchased is not received according to specifications or if they are defective, the buyer can return them to the seller or ask the seller for an allowance (e.g. reduction in price). Now, let’s explore sales return and purchase return journal entries in detail. Firstly, there is a need to debit account payables and credit purchase returns. It can be seen that Debiting Payables is a reduction in liability, whereas crediting purchase returns is a decrease in expense.

Is purchase returns a credit account?

Definition of Purchase Return

The account Purchases Returns is a general ledger account that will have a credit balance (or no balance). Its credit balance will offset the debit balance in the Purchases account.