What type of account is Purchase Return and Sales Return?

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Purchase Returns

Type of Account

Purchase returns is a nominal account. Generally, purchase returns show zero or unfavorable balance (Credit balance). It can also be termed as a 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 a 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 the 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 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.