Purchase Returns, Sales Returns accounts

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, reverse of the journal entries recorded at the time of making the purchase or sale as the case may be sounds rational or convenient.

Purchase Returns

  • Purchase (credit)
    Purchases a/c

    Nominal a/c

    Debit
    [Debit all expenses/losses]
    Seller a/c

    Personal a/c

    Credit
    [Credit the benefit giver]
  • Purchase Return
    Purchases a/c

    Nominal a/c

    Credit
     
    Seller a/c

    Personal a/c

    Debit
    [Debit the benefit receiver]

Sales Returns

  • Sales (credit)
    Sales a/c

    Nominal a/c

    Credit
    [Credit all incomes/gains]
    Buyer a/c

    Personal a/c

    Debit
    [Debit the benefit receiver]
  • Sales Return
    Sales a/c

    Nominal a/c

    Debit
     
    Buyer a/c

    Personal a/c

    Credit
    [Credit the benefit giver]
In trying to understand that transactions of purchase returns and sales returns, please consider only credit transactions of purchase and sale. Not that cash purchases and cash sales do not involve returns, but including them in this discussion would distort our understanding.

Recording Purchase returns » Reversing Entries : Illustration

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.

Consider the following transactions of a purchase and a return.

The organisation purchased goods from Mr. Ghavri on credit for 24,000. A Week later it returned goods to the extent of 3,000.

The net result of these transactions would be a net purchase of 21,000 from Mr. Ghavri. This can be reflected in our account books by recording the first transaction of credit purchase and then recording a reverse transaction at the time the goods are being returned.

Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Credit
(Cr)
Purchases a/c
To Mr. Ghavri a/c
Dr 24,000
24,000
[Being the value of goods purchased on credit from Mr. Ghavri ]
Mr. Ghavri a/c
To Purchases a/c
Dr 3,000
3,000
[Being the value of goods purchased on credit from Mr. Ghavri returned. ]

Ledgers

Purchases a/c
Dr Cr
Particulars Amount Particulars Amount
To Mr. Ghavri a/c 24,000 By Mr. Ghavri a/c 3,000
sub-total 24,000 sub-total 3,000
    By Balance c/d 21,000
Total 24,000 Total 24,000
To Balance b/d 21,000    
Mr. Ghavri a/c
Dr Cr
Particulars Amount Particulars Amount
To Purchases a/c 3,000 By Purchases a/c 24,000
sub-total 3,000 sub-total 24,000
To Balance c/d 21,000    
Total 24,000 Total 24,000
    By Balance b/d 21,000

Recording Sales returns » Reversing Entries : Illustration

Consider the following transactions of a purchase and a return.

Ms. Sunanda purchased goods from the organisation on credit for 65,000. A few days later she returned goods to the extent of 48,000.

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.

Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Credit
(Cr)
Ms. Sunanda a/c
To Sales a/c
Dr 65,000
65,000
[Being the value of goods sold on credit to Ms. Sunanda]
Sales a/c
To Ms. Sunanda a/c
Dr 48,000
48,000
[Being the value of goods sold on credit to Ms. Sunanda being returned.]

Ledgers

Sales a/c
Dr Cr
Particulars Amount Particulars Amount
To Ms. Sunanda a/c 48,000 By Ms. Sunanda a/c 65,000
sub-total 48,000 sub-total 65,000
To Balance c/d 17,000
Total 65,000 Total 65,000
By Balance b/d 17,000
Ms. Sunanda a/c
Dr Cr
Particulars Amount Particulars Amount
To Sales a/c 65,000 By Sales a/c 48,000
sub-total 65,000 sub-total 48,000
By Balance c/d 17,000
Total 65,000 Total 65,000
To Balance b/d 17,000

Costs incurred at the time of purchase/sale go waste

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

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 24,000. A Week later it returned goods to the extent of 3,000.

The net result of these transactions would be a net purchase of 21,000 from Mr. Ghavri. This can be reflected in our account books by recording the first transaction of credit purchase and the second transaction as a purchase return.

Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Credit
(Cr)
Purchases a/c
To Mr. Ghavri a/c
Dr 24,000
24,000
[Being the value of goods purchased on credit from Mr. Ghavri ]
Mr. Ghavri a/c
To Purchase Returns a/c
Dr 3,000
3,000
[Being the value of goods purchased on credit from Mr. Ghavri returned. ]

Ledgers

Purchases a/c
Dr Cr
Particulars Amount Particulars Amount
To Mr. Ghavri a/c 24,000
sub-total 24,000 sub-total 0
    By Balance c/d 24,000
Total 24,000 Total 24,000
To Balance b/d 24,000    
Purchase Returns a/c
Dr Cr
Particulars Amount Particulars Amount
By Mr. Ghavri a/c 3,000
sub-total 0 sub-total 3,000
To Balance c/d 3,000
Total 3,000 Total 3,000
By Balance b/d 3,000
Mr. Ghavri a/c
Dr Cr
Particulars Amount Particulars Amount
To Purchase Returns a/c 3,000 By Purchases a/c 24,000
sub-total 3,000 sub-total 24,000
To Balance c/d 21,000    
Total 24,000 Total 24,000
    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 65,000. A few days later she returned goods to the extent of 48,000.

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 the return as a sale return.

Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Credit
(Cr)
Ms. Sunanda a/c
To Sales a/c
Dr 65,000
65,000
[Being the value of goods sold on credit to Ms. Sunanda]
Sales Returns a/c
To Ms. Sunanda a/c
Dr 48,000
48,000
[Being the value of goods sold on credit to Ms. Sunanda being returned.]

Ledgers

Sales a/c
Dr Cr
Particulars Amount Particulars Amount
By Ms. Sunanda a/c 65,000
sub-total 0 sub-total 65,000
To Balance c/d 65,000
Total 65,000 Total 65,000
By Balance b/d 65,000
Sales Returns a/c
Dr Cr
Particulars Amount Particulars Amount
To Ms. Sunanda a/c 48,000
sub-total 48,000 sub-total 0
By Balance c/d 48,000
Total 48,000 Total 48,000
To Balance b/d 48,000

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.