Purchase Returns, Sales Returns accounts

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Returns » Purchases, Sales

 
 
Goods/Stock purchased or sold being returned is quite a common practice in business.

This may be on account of a number of reasons like defects in goods, quality not matching the requirement for which the buyer purchased it, the buyer not needing the stock, etc.

This happens both in case of goods purchased as well as goods sold by the organisation.

Where the goods sold are being returned we call it "Sales Returns" and where goods purchased are being returned we call it "Purchase Returns"

The transactions of return of goods are also accounting transactions and have to be recorded in the books of accounts just like any other accounting transaction.

Recording returns » Reversing the Entries

 
 
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, recording reversing the journal entries recorded at the time of making the purchase may sound rational or convenient.

• Purchase Returns

Considering a transaction of credit purchases, the two elements effected would be the Purchases a/c and the Vendor a/c. Purchase of stock, being an expenditure, the Purchases a/c is debited and the Vendor being the benefit giver the Vendor a/c is credited.

Therefore in recording a transaction of Purchase Returns, the Vendor a/c is debited and the Purchases a/c is credited.

• Sales Returns

Considering a transaction of credit sales, the two elements effected would be the Sales a/c and the Buyer a/c. Sale of stock, being an income, the Sales a/c is credited and the Buyer being the benefit receiver the Buyer a/c is debited.

Therefore in recording a transaction of Sales Return, the Buyer a/c is credited and the Sales a/c is debited.

Recording Purchase returns » Reversing Entries : Illustration

 
 
The organisation purchased goods from Mr. Ghavri on credit for Rs. 24,000. A Week later it returned goods to the extent of Rs. 3,000.
The net result of these transactions would be a net purchase of Rs. 21,000 from Mr. Ghavri.

This can be reflected in our account books by recording the first transaction as a credit purchase and recording a reverse transaction at the time of returns.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
24,000
24,000
June 21st Dr
3,000
3,000
DrPurchases a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
15/06/05 To Mr. Ghavri a/c 24,000 21/06/05 By Mr. Ghavri a/c 3,000
  sub-total   24,000   sub-total   3,000
        21/06/05 By Balance c/d 21,000
  Total   24,000   Total   24,000
22/06/05 To Balance b/d 21,000        
DrMr. Ghavri a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
21/06/05 To Purchases a/c 3,000 15/06/05 By Purchases a/c 24,000
  sub-total   3,000   sub-total   24,000
21/06/05 To Balance c/d 21,000        
  Total   24,000   Total   24,000
        22/06/05 By Balance b/d 21,000

Recording Sales returns » Reversing Entries : Illustration

 
 
Ms. Sunanda purchased goods from the organisation on credit for Rs. 65,000. 2 days later she returned goods to the extent of Rs. 48,000.
The net result of these transactions would be a net sale of Rs. 17,000 to Ms. Sunanda.

This can be reflected in our account books by recording the first transaction as a credit sale and recording a reverse transaction at the time of returns.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
65,000
65,000
June 17th Dr
48,000
48,000
DrSales a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
15/06/05 To Ms. Sunanda a/c 48,000 17/06/05 By Ms. Sunanda a/c 65,000
  sub-total   48,000   sub-total   65,000
17/06/05 To Balance c/d 17,000        
  Total   65,000   Total   65,000
        18/06/05 To Balance b/d 17,000
DrMs. Sunanda a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
21/06/05 To Sales a/c 65,000 15/06/05 By Sales a/c 48,000
  sub-total   65,000   sub-total   48,000
        21/06/05 By Balance c/d 17,000
  Total   65,000   Total   65,000
18/06/05 By Balance b/d 17,000        

Transactions involve costs

 
 
Isn't using the reverse entry a convenient method for recording. To understand this we will have to understand costs incurred in relation to transactions.

For a transaction of purchase we would have to incur costs like administration cost for placing the order, cost for carrying in the goods, etc. For a transaction of sale we would have to incur costs like administration cost for processing the order, cost for packing the goods, cost for delivering the goods etc.

When the goods are returned these charges which have been expended at the time of the original transaction may go waste. Additional transaction costs like transportation cost, packing cost for returning the goods etc., may also have to be incurred in relation to the return transactions. Whoever bears the additional cost, it surely is a waste as it benefits neither of the parties to the transaction.

It would be impractical to think of in terms of eliminating the possibility of such transaction. Their occurrence is natural and acceptable. What we look at is to reduce the possibility of returns. An organisation should always pay attention to these whenever there are returns beyond a certain level, whether they be purchase returns or sales returns.

• Excess Sales returns

The excess sales returns indicate that
  • Goods which do not meet the requirements of the customers are being sold to them.
  • The quality of goods being sold is poor
  • That sales (quantities) are being made to customers without any caution with regard to the possibility of their returning them
The excess sales returns may result in
  • The supply schedule or manufacturing schedule of the buyer getting disturbed which ultimately may result in the buyer moving away to other vendors

• Excess Purchase returns

The excess purchase returns indicate that
  • Goods which do not meet the organisational requirements are being purchased
  • The quality of goods being purchased is poor
  • Purchases (quantities) are being made from vendors without any caution with regard to the possibility of their having to return them on account of their being in excess.
The excess purchase returns may result in
  • The Organisational supply schedule or manufacturing schedule getting disturbed which ultimately may result in the organisation losing its customers.

Using Purchase Returns a/c and Sales Returns a/c

 
 
"accountancy,basic,financial,accounting,process"
We have seen that information relating to purchase returns and sales returns would make the organisation sit back and think whenever they find them to be in excess of normal.

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.

We know that "The basic purpose of accounting is derivation of information. The more information we need the more the accounting heads we have to maintain"

Thus, to enable the organisations to take proper decisions based on the information relating to returns, separate ledger accounts are used to record the transactions of purchase returns ("Purchase Returns a/c") and sales returns ("Sales Returns a/c").

Recording Purchase returns » using Purchase Returns a/c

 
 
The organisation purchased goods from Mr. Ghavri on credit for Rs. 24,000. A Week later it returned goods to the extent of Rs. 3,000.
The net result of these transactions would be a net purchase of Rs. 21,000 from Mr. Ghavri.

This can be reflected in our account books by recording the first transaction as a credit purchase and recording the second transaction as a transaction of purchase returns.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
24,000
24,000
June 21st Dr
3,000
3,000

DrPurchases a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
15/06/05 To Mr. Ghavri a/c 24,000        
  sub-total   24,000   sub-total   0
        21/06/05 By Balance c/d 24,000
  Total   24,000   Total   24,000
22/06/05 To Balance b/d 24,000        

DrPurchase Returns a/c Cr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
        21/06/05 By Mr. Ghavri a/c 3,000
  sub-total   0   sub-total   3,000
21/06/05 By Balance c/d 3,000        
  Total   3,000   Total   3,000
        22/06/05 To Balance b/d 3,000

DrMr. Ghavri a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
21/06/05 To Purchase
Returns a/c


3,000
15/06/05 By Purchases a/c 24,000
       
  sub-total   3,000   sub-total   24,000
21/06/05 To Balance c/d 21,000        
  Total   24,000   Total   24,000
        22/06/05 By Balance b/d 21,000

• Net Purchases

The net purchases can be obtained at any time by setting off the balances in the Purchases a/c and the Purchase Returns a/c.

Recording Sales returns » using Sales Returns a/c

 
 
Ms. Sunanda purchased goods from the organisation on credit for Rs. 65,000. 2 days later she returned goods to the extent of Rs. 48,000.
The net result of these transactions would be a net sale of Rs. 17,000 to Ms. Sunanda.

This can be reflected in our account books by recording the first transaction as a credit sale and recording the second transaction as a transaction of sales returns.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
65,000
65,000
June 17th Dr
48,000
48,000

DrSales a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
        17/06/05 By Ms. Sunanda a/c 65,000
  sub-total   0   sub-total   65,000
17/06/05 To Balance c/d 65,000        
  Total   65,000   Total   65,000
        18/06/05 By Balance b/d 65,000

DrSales Returns a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
17/06/05 To Ms. Sunanda a/c 48,000        
  sub-total   48,000   sub-total   0
        17/06/05 By Balance c/d 48,000
  Total   48,000   Total   48,000
18/06/05 To Balance b/d 48,000        

DrMs. Sunanda a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
21/06/05 To Sales a/c 65,000 15/06/05 By Sales Returns a/c 48,000
  sub-total   65,000   sub-total   48,000
        21/06/05 By Balance c/d 17,000
  Total   65,000   Total   65,000
18/06/05 By Balance b/d 17,000        

Net Sales

The net sales can be obtained at any time by setting off the balances in the Sales a/c and the Sales Returns a/c.

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