Return inwards and Return outwards are deducted from?

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Return Inwards

The return inwards arises when goods sold are returned back by the customers. They might return the entire order or only a part of it. It is also known as Sales Returns. Such returns are deducted from sales on the credit side of the Trading Account.

Journal entry for Return Inwards 

When there is a return inwards, the following journal entry is passed-

(Goods returned by the customer)

As per Modern rules of Accounting,

For example, 

I am a dealer in smartphones and I sell them on Amazon which has 30 days replacement guarantee scheme especially when the customer buys a certain electronic item. Hence for me when the customer returns the smartphone that he purchased it becomes a return inward and so it will be deducted from my sales. 

Return Outwards

The return outwards arises when the goods purchased are returned. It is also known as Purchase Returns. Such returns are deducted from purchases on the debit side of the Trading Account.

Journal entry for Return Outwards

When there is a return outward, the following journal entry is passed-

(Goods returned to the seller)

As per Modern rules of Accounting,

For Example,

I am a watch dealer and I have placed an order with my supplier to supply 20 Smart Watches but he sent me 5 watches of another model so I return them. This is a case of return outward as I am sending goods back to the supplier and hence it shall be deducted from my purchases.

Accounting Treatment of Return Inwards and Return Outwards

1. Return Inwards

• Return inwards are deducted from sales in the Trading Account, hence giving net sales.
• It is not shown in the Balance Sheet.

2. Return Outwards

• Return outwards are deducted from purchases in the Trading Account, hence giving net purchases.
• It is also not shown in the Balance Sheet.