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Trading Account :: Net Purchases/Sales = Purchases/Sales Less Returns

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... From Page 12

Purchases and Sales » Return a/c's

 
 
Each ledger account provides one or more pieces of information. To enable derivation of additional information relating to returns of goods/stock, we record the transactions relating to purchase returns as well as sales returns using Purchase Returns a/c and Sales Returns a/c respectively.

• Purchases Returns a/c

Purchase Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned to the seller from whom the stock has been purchased.

Being a nominal account, this account is closed at the end of the accounting period.

• Sales Returns a/c

Sales Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned by the buyers to whom the stock has been sold.

Being a nominal account, this account is closed at the end of the accounting period.

• Gross Purchases and Gross Sales

The Purchase Returns a/c and the Sales Returns a/c provide information relating to returns only.

Since returns are recorded separately using these accounts, the Purchases a/c and Sales a/c give the information relating to the Gross Purchases and Gross Sales.

• Need for information relating to Net Values

Along with the information relating to the returns and the gross values, the organisation needs the information relating to the net values i.e. the net purchases and net sales made by it.

There are two methods adopted for deriving the information relating to Net Purchases and Net Sales.

  • By Setting off related Ledger account balances.
  • By Transferring the balance in the returns accounts to Trading a/c and making adjustments thereon.

This information is generally derived at the end of the accounting period. However, it can be derived as and when needed, by deducting the balance in the returns account from the balance in the main account.

final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments

Finding Net Purchases/Sales by Setting off related Ledger Account Balances

 
 

SET OFF » Setting off of ledger accounts is clubbing two accounts with opposite balances. In setting off ledger account balances, we close the account with the lower balance by transferring it to the account with a higher balance.

• Finding Net Purchases

The Purchases a/c carries a debit balance and the Purchase Returns a/c carries a credit balance. At the end of the accounting period, the two accounts are set off i.e. the Purchase Returns a/c is closed by transfer to the Purchases a/c.

Transfer of a credit balance from one account to a second would result in the second account being credited and the first account being debited.

The balance remaining in the Purchases a/c would thus represent net purchases. While closing the purchases account at the end of the accounting period, this balance is transferred to the Trading a/c

• Journal/Ledger Show/Hide

The journal entry for recording the transfer would be

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)
March 31st Dr
80,000
80,000
[For transferring the balance in the purchase returns account to the purchases account to derive the net purchases]

DrPurchase Returns a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)

To Purchases a/c

80,000
By –
By –

  80,000   80,000

DrPurchases a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To –
To –


By Purchase Returns a/c
By Trading a/c
80,000
5,00,000
  5,80,000   5,80,000

• Finding Net Sales

The Sales a/c carries a credit balance and the Sales Returns a/c carries a debit balance. At the end of the accounting period, the two accounts are set off i.e. the Sales Returns a/c is closed by transfer to the Sales a/c.

Transfer of a debit balance from one account to a second would result in the second account being debited and the first account being credited.

The balance remaining in the Sales a/c would thus represent net sales. While closing the Sales account at the end of the accounting period, this balance is transferred to the Trading a/c

• Journal/Ledger Show/Hide

The journal entry for recording the transfer would be

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)
March 31st Dr
72,500
72,500
[For transferring the balance in the sales returns account to the sales account to derive the net sales]

DrSales Returns a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To –
To –


By Sales a/c

72,500
  72,500   72,500

DrSales a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Sales Returns a/c
To Trading a/c
72,500
7,51,500
By –
By –


  8,24,000   8,24,000

• Information in Trading a/c

If this method is adopted for deriving the value of net purchases and sales, the Trading a/c would not display information relating to returns and would contain postings as To Purchases a/c on the debit side and the By Sales a/c on the credit side.

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Wages
To Octroi
To Carriage Inwards
To Gross Profit
40,000
5,00,000
45,000
32,000
15,000
2,40,500
By Sales
Closing Stock
7,51,500
76,000
  8,27,500   8,27,500

Transferring balances in Purchases/Sales Returns a/c to Trading a/c

 
 
The Purchase Returns a/c and the Sales Returns a/c being nominal accounts are closed at the end of the accounting period by transfer to the Trading a/c (instead of to the Purchases a/c and Sales a/c respectively).

The Purchase Returns a/c carries a credit balance and the "Sales Returns a/c" carries a credit balance.

• Journal

The journal entries for closing these accounts by transfer to the trading account would be

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)
March 31st Dr
80,000
80,000
[For transferring the balance in the purchase returns account at the end of the accounting period to the trading account]
March 31st Dr
72,500
72,500
[For transferring the balance in the sales returns account at the end of the accounting period to the trading account]

• Posting in Trading a/c

The "Trading a/c" with these journal entries posted:

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Sales Returns
To Wages
To Octroi
To Carriage Inwards
To Gross Profit
40,000
5,80,000
72,500
45,000
32,000
15,000
2,40,500
By Sales
By Purchase Returns
Closing Stock
8,24,000
80,000
76,000
  9,80,000   9,80,000

We cannot derive the information relating to Net Purchases and Net Sales by just Posting the entries to the Trading a/c.

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Adjustment in Trading a/c : Information relating to Net Purchases/Sales

 
 
Since the information relating to Net Purchases and Net Sales is not revealed by just transferring the balances in the returns accounts to the Trading a/c we need to make adjustments to derive that information.

• Net Purchases

Posting (showing) an amount on the credit side of an account is an equivalent of deducting the amount from an item on the debit side.

Thus the Purchase Returns a/c balance instead of being shown on the credit side is deducted from Purchases a/c balance on the debit side of the Trading a/c, thereby giving the figure of Net Purchases in the Trading a/c itself.

• Net Sales

Posting (showing) an amount on the debit side of an account is an equivalent of deducting the amount from an item on the credit side.

Thus, the Sales Returns a/c balance instead of being shown on the debit side would be deducted from Sales a/c on the credit side of the Trading a/c, thereby giving us the figure of Net Sales in the Trading account itself.

• Deriving from the Trading a/c

DrTrading a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Opening Stock
To Purchases
    (−) Pur. Returns
To Wages
To Octroi
To Carriage Inwards
To Gross Profit

5,80,000
  80,000
40,000

5,00,000
45,000
32,000
15,000
2,40,500
By Sales
    (−) Sales Returns
Closing Stock
8,24,000
  72,500

7,51,500
76,000
    8,27,500     8,27,500

Such an adjustment would not affect the figure of gross profit.

Author Credit : The Edifier ... Continued Page 14

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