Goods/Stock purchased or sold being returned is quite a common practice in business.

This may be on account of a number of reasons like defects in goods, quality not matching the requirement for which the buyer purchased it, the buyer not needing the stock, etc.

This happens both in case of goods purchased as well as goods sold by the organisation.

Where the goods sold are being returned we call it "Sales Returns" and where goods purchased are being returned we call it "Purchase Returns"

The transactions of return of goods are also accounting transactions and have to be recorded in the books of accounts just like any other accounting transaction.

The transactions of returning the goods either in case of purchase or in case of sale are exactly the reverse of the transactions of purchase and sale of goods. Thus, for these transactions of returns, reverse of the journal entries recorded at the time of making the purchase or sale as the case may be sounds rational or convenient.

Purchase Returns

• Purchase (credit)

  Purchases a/c
  ↓
  Nominal a/c
  ↓
  Debit
  [Debit all expenses/losses]

  Seller a/c
  ↓
  Personal a/c
  ↓
  Credit
  [Credit the benefit giver]

• Purchase Return

  Purchases a/c
  ↓
  Nominal a/c
  ↓
  Credit
  [Credit all incomes/gains]

  Seller a/c
  ↓
  Personal a/c
  ↓
  Debit
  [Debit the benefit receiver]

Sales Returns

• Sales (credit)

  Sales a/c
  ↓
  Nominal a/c
  ↓
  Credit
  [Credit all incomes/gains]

  Buyer a/c
  ↓
  Personal a/c
  ↓
  Debit
  [Debit the benefit receiver]

• Sales Return

  Sales a/c
  ↓
  Nominal a/c
  ↓
  Debit
  [Debit all expenses/losses]

  Buyer a/c
  ↓
  Personal a/c
  ↓
  Credit
  [Credit the benefit giver]

In trying to understand the transactions of purchase returns and sales returns, please consider only credit transactions of purchase and sale. Not that cash purchases and cash sales do not involve returns, but including them in this discussion would distort our understanding.

The transactions of returning the goods purchased may be treated as an exact opposite of the transaction of purchase. Note that we are for now considering a return of goods in case of purchase made on credit only.

Consider the following transactions of a purchase and a return.

The organisation purchased goods from Mr. Ghavri on credit for 24,000. A Week later it returned goods to the extent of 3,000.

The net result of these transactions would be a net purchase of 21,000 from Mr. Ghavri.

This can be reflected in our account books by recording the first transaction of credit purchase and then recording a reverse transaction at the time the goods are being returned.

Ledgers

Consider the following transactions of a purchase and a return.

Ms. Sunanda purchased goods from the organisation on credit for 65,000. A few days later she returned goods to the extent of 48,000.

The net result of these transactions would be a net sale of 17,000 to Ms. Sunanda. This can be reflected in our account books by recording the first transaction of a credit sale and then recording a reverse transaction at the time of goods being returned.

Ledgers

To understand this we will have to understand costs incurred in relation to transactions.

For a transaction of purchase we would have to incur costs like administration cost for placing the order, cost for carrying in the goods, etc. For a transaction of sale we would have to incur costs like administration cost for processing the order, cost for packing the goods, cost for delivering the goods etc.

When the goods are returned these charges which have been expended at the time of the original transaction may go waste. Additional transaction costs like transportation cost, packing cost for returning the goods etc., may also have to be incurred in relation to the return transactions. Whoever bears the additional cost, it surely is a waste as it benefits neither of the parties to the transaction.

It would be impractical to think of in terms of eliminating the possibility of such transaction. Their occurrence is natural and acceptable. What we look at is to reduce the possibility of returns. An organisation should always pay attention to these whenever there are returns beyond a certain level, whether they be purchase returns or sales returns.

Excess Sales returns

Excess sales returns indicate that

• Goods which do not meet the requirements of the customers are being sold to them.
• The quality of goods being sold is poor
• That sales (quantities) are being made to customers without any caution with regard to the possibility of their returning them

Excess sales returns may result in

• The supply schedule or manufacturing schedule of the buyer getting disturbed which ultimately may result in the buyer moving away to other vendors

Excess Purchase returns

Excess purchase returns indicate that

• Goods which do not meet the organisational requirements are being purchased
• The quality of goods being purchased is poor
• Purchases (quantities) are being made from vendors without any caution with regard to the possibility of their having to return them on account of their being in excess.

Excess purchase returns may result in

• The Organisational supply schedule or manufacturing schedule getting disturbed which ultimately may result in the organisation losing its customers.

We have seen that information relating to purchase returns and sales returns would make the organisation sit back and think whenever they find them to be in excess of normal.

When the returns are recorded by reversing the entries for the original transaction, no separate information would be available with regard to returns. Only the net information after setting off the returns would be revealed by the Purchases a/c and Sales a/c.

We know that "The basic purpose of accounting is derivation of information. The more the information we need the more the accounting heads we have to maintain"

Thus, to enable the organisations to take proper decisions based on the information relating to returns, separate ledger accounts are used to record the transactions of purchase returns ("Purchase Returns a/c") and sales returns ("Sales Returns a/c").

The organisation purchased goods from Mr. Ghavri on credit for 24,000. A Week later it returned goods to the extent of 3,000.

The net result of these transactions would be a net purchase of 21,000 from Mr. Ghavri. This can be reflected in our account books by recording the first transaction of credit purchase and the second transaction as a purchase return.

Ledgers

Net Purchases

The net purchases can be obtained at any time by setting off the balances in the Purchases a/c and the Purchase Returns a/c.

Ms. Sunanda purchased goods from the organisation on credit for 65,000. A few days later she returned goods to the extent of 48,000.

The net result of these transactions would be a net sale of 17,000 to Ms. Sunanda. This can be reflected in our account books by recording the first transaction of a credit sale and then recording the return as a sale return.

Ledgers

Net Sales

The net sales can be obtained at any time by setting off the balances in the Sales a/c and the Sales Returns a/c.