Sales return is debited in the books of accounts. It is a contra revenue account. To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship. Rule of accounting Modern rules The modern rule is as followsRead more
Sales return is debited in the books of accounts. It is a contra revenue account.
To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship.
Rule of accounting
Modern rules
The modern rule is as follows
| Type of account | Debit | Credit |
| Revenue account | Decrease | Increase |
When a sale is made it is credited in the books of account as it leads to an increase in the revenue, however, when the goods are returned by the customer it has a debit effect because it leads to a decrease in the revenue.
According to the modern rule of accounting, the sales return account has been debited because it leads to a fall in the revenue of the business. In case the sales were made on a credit basis the expected accounts receivable should be credited by the amount of sales returned as no amount shall be received. However, if the sales were made on a cash basis then an accounts payable should be issued to acknowledge the liability of repaying the customer for the purchase.
Example:
The credit sales of 1,00,000 were returned by Mr. K to ABC Ltd. as the goods were defective. The journal entry in the books of ABC Ltd. is as follows
| Sales return a/c | Debit | 1,00,000 | Debit the decrease in revenue | |
| To Mr. K’s a/c | Credit | 1,00,000 | Credit the decrease in asset |
(being goods returned by the customer)
Hope this helps.
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Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more
Purchase return is credited in the books of accounts.
To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.
Rules of accounting
To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.
Golden or the traditional rules of accounting
Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:
“Debit all expenses and losses,
Credit all incomes and gains.”
Example
ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:
Purchase a/c
Debit
60,000
To cash a/c
Credit
60,000
(being goods purchased from the supplier)
Cash a/c
Debit
30,000
To Purchase return a/c
Credit
30,000
(being goods returned to the seller)
Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)
Modern rules of accounting
The modern rule is as follows:
Example
XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows
Purchase a/c
Debit
40,000
To Mr. A’s a/c
Credit
40,000
(being goods purchased on credit basis)
Mr. A’s a/c
Debit
10,000
To Purchase return a/c
Credit
10,000
(being goods returned to the supplier)
Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)
Hope this helps.
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