Purchase Returns Type of Account Purchase returns is a nominal account. Generally, purchase returns show zero or unfavourable balance (Credit balance). It can also be termed as contra-expense account as purchase returns reduce our purchase expenses. Accounting approaches Traditional accounting approRead more
Purchase Returns
Type of Account
Purchase returns is a nominal account. Generally, purchase returns show zero or unfavourable balance (Credit balance). It can also be termed as contra-expense account as purchase returns reduce our purchase expenses.
Accounting approaches
- Traditional accounting approach
| Accounts Involved | Debit/Credit | Nature of Account |
| Creditors a/c | Debit | Personal |
| To purchase returns a/c | Credit | Nominal |
- Modern accounting approach
| Accounts Involved | Debit/Credit | Nature of Account | Accounting Rule |
| Creditors a/c | Debit | Liability | Decrease in liability |
| To purchase returns a/c | Credit | Expense | Decrease in expense |
Example
ABC and Co. purchase goods from Max and Co. for 1,00,000 on credit. ABC and Co. later return the goods to Max and Co. due to a serious defect. Pass journal entry for the above transaction.
The initial purchase entry will be recorded as follows
| Accounts Involved | Debit/Credit | Nature of Account | Value |
| Purchase a/c | Debit | Expense | 1,00,000 |
| To Max a/c | Credit | Liability | 1,00,000 |
(Being goods purchased on credit)
On the return of the refrigerator, the following entry will be passed-
| Accounts Involved | Debit/Credit | Nature of Account | Value |
| Max a/c | Debit | Liability | 1,00,000 |
| To purchase returns a/c | Credit | Expense | 1,00,000 |
(Being goods returned due to serious defects)
Sales Returns
Type of Account
Sales returns is a nominal account. Generally, sales returns show zero or favourable balance (Debit balance). It can also be termed as contra-revenue account as sales returns reduce our sales revenue.
Accounting approach
- Traditional accounting approach
| Accounts Involved | Debit/Credit | Nature of Account |
| Sales return a/c | Debit | Nominal |
| To Debtors a/c | Credit | Personal |
- Modern accounting approach
| Accounts Involved | Debit/Credit | Nature of Account | Accounting Rule |
| Sales return a/c | Debit | Income | Decrease in income |
| To Debtors a/c | Credit | Asset | Decrease in asset |
Example
XYZ and Co. sold goods to Alexa and Co. for 5,00,000 on credit. Alexa and Co. later return the goods to XYZ and Co. due to serious issues. Pass journal entry for the above transaction.
The initial sale entry will be recorded as follows
| Accounts Involved | Debit/Credit | Nature of Account | Value |
| Alexa and Co. a/c | Debit | Asset | 1,00,000 |
| To Sales a/c | Credit | Income | 1,00,000 |
(Being goods sold on credit)
On the return of air-conditioner, the following entry will be passed
| Accounts Involved | Debit/Credit | Nature of Account | Value |
| Sales return a/c | Debit | Income | 1,00,000 |
| To Alexa and Co. a/c | Credit | Asset | 1,00,000 |
(Being goods returned due to serious issues)
Why are the purchase and sales return nominal and not personal?
The logic behind it is that the ledger balances of nominal accounts get settled and closed at the end of every accounting period (within 12 months) by transferring them to trading and profit and loss account whereas ledger balances of personal and real accounts are carried forward to the next accounting years.
I hope this explanation helps you in any way.
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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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