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

• Modern accounting approach

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

(Being goods purchased on credit)

On the return of the refrigerator, the following entry will be passed-

(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

• Modern accounting approach

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

(Being goods sold on credit)

On the return of air-conditioner, the following entry will be passed

(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.