Accounting and Journal Entry for Purchase Returns

Journal Entry for Purchase Returns or Return Outwards

Sometimes goods purchased by a business are found unfit for use and may need to be returned to the respective supplier(s). This may happen due to several different reasons, in business terminology, this action is termed as purchase returns or return outwards. Journal entry for purchase returns or return outwards is explained further in this article.

All such events related to goods being returned are documented in the final accounts as they have a monetary impact. Depending on the terms and conditions of a transaction, goods purchased both in cash and credit may be returned.

 

Journal Entry for Purchase Returns or Return Outwards (in Credit)

Creditor’s AccountDebitDebit the decrease in liability
 To Purchase ReturnsCreditCredit the decrease in expense

 

Journal entry for purchase returns or return outwards

Treatment of purchase returns or return outwards in books of accounts

 

Treatment of Purchase Returns in the Financial Statements

Return outwards or purchase returns are shown in the trading account as an adjustment (reduction) from the total purchases for an accounting period.

It is not shown in the income statement or the balance sheet.

Purchase returns shown in the trading account

Related Topic – What is COGS or Cost of Goods Sold?

 

Example – Journal Entry for Purchase Returns

Unreal Corporation purchased raw material worth 90,000 on credit from ABC Corporation. However, at the time of delivery of the goods 5,000 worth of goods were found unfit because of inferior quality.

These goods were returned back to ABC Corporation. Post an accounting entry for purchase returns in the books of Unreal Corporation.

Journal entry for purchase returns in the books of Unreal Corporation

ABC Corp. A/C5,000
 To Purchase Returns5,000

 

As per the three golden rules of accounting,

ABC Corp. AccountPersonalDebitDebit the Receiver
Purchase Returns AccountNominalCreditCredit all incomes/gains

Purchase return isn’t exactly gain or an income for the company, however, it reduces liability (in case of credit purchase), therefore, it indirectly acts as a gain.

 

Short Quiz for Self-Evaluation

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