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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 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.”
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||Debit all expenses and losses|
|To cash a/c||Credit||60,000||Credit what goes out|
(being goods purchased from the supplier)
|Cash a/c||Debit||30,000||Debit what comes in|
|To Purchase return a/c||Credit||30,000||Credit all incomes and gains|
(being goods returned to the seller)
Note: A debit of 60,000 in the Purchase a/c and 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;
|Type of account||Debit||Credit|
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||Debit the increase in expenses|
|To Mr A’s a/c||Credit||40,000||Credit the increase in liability|
(being goods purchased on a credit basis)
|Mr A’s a/c||Debit||10,000||Debit the decrease in liability|
|To Purchase return a/c||Credit||10,000||Credit the decrease in expenses|
(being goods returned to the supplier)
Note: A debit of 40,000 in the Purchase a/c and 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)