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.
See less
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
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
(being goods returned by the customer)
Hope this helps.
See less