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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.
