A company purchases goods from its suppliers to sell them or use them in its production activities. In some cases, however, purchasers of these goods may find they must return them to the original seller. The most common reasons for returning purchased goods are damaged goods, incorrect quantities of goods received, poor quality of goods received, and delivery of the wrong items. When a purchaser returns an item purchased to its supplier, this transaction is referred to as a “purchase return” in accounting.
When a company understands how to handle purchase returns, it will positively affect many aspects of its business, including overall expenses, inventory records, and financial statements.
In this article, you will learn about what purchase returns are, why they occur, and how to account for them in your company’s books.
Meaning of Purchase Return
A purchase return is goods that a business sends back to its supplier after purchase. It represents the reversal of a purchase transaction, either fully or partially.
In simple terms, when a buyer is dissatisfied with the goods purchased and returns them to the seller, it is treated as a purchase return in the buyer’s books of accounts.
Purchase return is also known as returns outward.
Common Reasons for Purchase Return
Businesses may return goods to suppliers for several reasons, such as –
- Goods received are damaged or defective.
- Wrong items or specifications supplied
- Inferior quality of goods
- Excess quantity delivered
- Goods not delivered as per the agreed terms.
- Expired or outdated products
Purchase returns help businesses avoid losses and ensure that only acceptable goods are kept in stock.
Purchase Return in Accounting Records
In accounting, purchase returns are recorded to reduce the total purchases made during a period. When goods are returned, the liability towards the supplier also decreases.
Purchase returns are usually recorded through a Purchase Return Book or directly in the accounting software, depending on the size of the business.
Accounting Treatment of Purchase Return
The accounting entry for a purchase return depends on whether the goods were purchased for cash or on credit.
If goods were purchased on credit and later returned, the supplier’s account is debited, and the Purchase Return account is credited.
If goods were purchased for cash and returned, the cash or bank account is debited, and the Purchase Return account is credited.
The Purchase Return account appears as a deduction from total purchases in the trading account.
Purchase Return Vs Sales Return
Purchase return and sales return are often confused, but they represent opposite sides of a transaction.
A purchase return is recorded by the buyer when goods are returned to the supplier. A sales return is recorded by the seller when goods are returned by the customer.
In the buyer’s books, a purchase return reduces purchases. In the seller’s books, the same transaction is treated as a sales return.
Impact of Purchase Return on Financial Statements
Purchase returns affect multiple aspects of financial statements.
They reduce the cost of purchases, which in turn increases the gross profit if all other factors remain constant. Inventory levels are also adjusted when goods are returned.
Additionally, purchase returns reduce the amount payable to suppliers, improving short-term cash flow.
Purchase Return and GST
Under GST, purchase returns require proper adjustment of tax already paid. When goods are returned, the supplier issues a credit note, and GST liability is adjusted accordingly.
Proper documentation is essential to ensure correct tax credit and compliance with GST laws.
Importance of Recording Purchase Returns Properly
Accurate recording of purchase returns is important for maintaining correct inventory records and supplier balances. It helps businesses avoid overstating expenses and ensures that financial statements reflect the true financial position.
Failure to record purchase returns properly can lead to incorrect profit calculation and tax issues.
Example of Purchase Return
Suppose a business purchases goods worth ₹50,000 from a supplier. Later, goods worth ₹5,000 are found defective and returned.
In this case, ₹5,000 is treated as a purchase return, and the net purchase value becomes ₹45,000.
Conclusion
Accounting for Purchase Returns is one way to record the return of a product to the supplier by the buyer for various reasons, such as poor quality, defects, incorrect supply, etc. Purchase Returns are important because they allow businesses to record their purchases, keep track of their inventory, and manage their suppliers accurately. Financial statement accuracy is increased when Returns of Purchase are recorded on the financial statements, because they are a key component of compliance with various government and tax regulations.
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