Is purchase return a debit or credit?

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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.”

 

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 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
Expense account Increase Decrease

 

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 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)