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Home/Questions/Q 60215
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Sapna Takia
Sapna Takia
In: Category - Accounting Interviews

What type of account is Purchase Return and Sales Return?

purchase returnsales returntype of account
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    1. Dheeraj
      2020-07-29T22:21:26+05:30Added an answer on July 29, 2020 at 10:21 pm
      This answer was edited.

      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

       

      Accounts InvolvedDebit/CreditNature of Account
      Creditors a/cDebitPersonal
       To purchase returns a/cCreditNominal
      • Modern accounting approach

       

      Accounts InvolvedDebit/CreditNature of AccountAccounting Rule
      Creditors a/cDebitLiabilityDecrease in liability
       To purchase returns a/cCreditExpenseDecrease 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 InvolvedDebit/CreditNature of AccountValue
      Purchase a/cDebitExpense1,00,000
       To Max a/cCreditLiability 1,00,000

      (Being goods purchased on credit)

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

      Accounts InvolvedDebit/CreditNature of AccountValue
      Max a/cDebitLiability1,00,000
       To purchase returns a/cCreditExpense 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 contra-revenue account as sales returns reduce our sales revenue.

      Accounting approach

      • Traditional accounting approach

       

      Accounts InvolvedDebit/CreditNature of Account
      Sales return a/cDebitNominal
       To Debtors a/cCreditPersonal
      • Modern accounting approach

       

      Accounts InvolvedDebit/CreditNature of AccountAccounting Rule
      Sales return a/cDebitIncomeDecrease in income
       To Debtors a/cCreditAssetDecrease 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 InvolvedDebit/CreditNature of AccountValue
      Alexa and Co. a/cDebitAsset1,00,000
       To Sales a/cCreditIncome 1,00,000

      (Being goods sold on credit)

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

      Accounts InvolvedDebit/CreditNature of AccountValue
      Sales return a/cDebitIncome1,00,000
       To Alexa and Co. a/cCreditAsset 1,00,000

      (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.

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