Purchases returns, or returns outwards, are a normal part of business. Goods may be returned to supplier if they carry defects or if they are not according to the specifications of the buyer.
Accounting for Purchase Returns
There is need to account for purchase returns as though no purchase had occurred in the first place.
Hence, the value of goods returned to the supplier must be deducted from purchases.
If purchase was initially made on credit, the payable recognized must be reversed by the amount of purchases returned. If the purchases in respect of the goods returned were made for cash, then a receivable must be recognized to acknowledge the asset resulting from the expected reimbursement to be received from the supplier in respect of the returned goods.
Purchase Return - Credit Purchases
In case of credit purchases,the following double entry must be made upon purchases returns:
|
Debit |
Payable (decrease in liability) |
|
Credit |
Purchases Return (decrease in expense) |
Example
Bike LTD purchases a mountain bike from BMX LTD for $100 on credit. Bike LTD later returns the bike to BMX LTD due to a serious defect in the design of the bike.
The initial purchase will be recorded as follows:
|
Debit |
Purchases |
$100 |
|
Credit |
BMX LTD (Payable) |
$100 |
Upon the return of bike, the following double entry will be passed:
|
Debit |
BMX LTD (Payable) |
$100 |
|
Credit |
Purchases Return |
$100 |
No further entry will be required as the payable due to BMX LTD has been reversed.
Purchase Returns - Cash Purchase
In case of cash purchases, the following double entry must be made upon sales returns:
|
Debit |
Receivable (increase in asset) |
|
Credit |
Purchases Return (decrease in expense) |
Example
Bike LTD purchases a mountain bike from BMX LTD for $100 on cash. Bike LTD later returns the bike to BMX LTD due to a serious defect in the design of the bike.
The initial purchase will be recorded as follows:
|
Debit |
Purchases |
$100 |
|
Credit |
Cash |
$100 |
Upon the return of bike, the following double entry will be passed:
|
Debit |
BMX LTD (Receivable) |
$100 |
|
Credit |
Purchases Return |
$100 |
When BMX LTD will pay $100 owed to Bike LTD in respect of the purchases return, the following double entry will be recorded in Bike LTD’s books:
|
Debit |
Cash |
$100 |
|
Credit |
BMX LTD (Receivable) |
$100 |