Companies use various techniques to retain their customers. Usually, it involves offering them the best quality products for a reasonable amount. Sometimes, though, customers may not like the items sold to them by their suppliers. Companies also offer purchase returns as a part of their policies to ensure customer retention in the future.
The accounting for purchase returns is straightforward. However, it is not as easy as reversing the original purchase journal entry. On top of that, the process may also require additional disclosures in the financial statements. Before discussing those, it is crucial to understand what purchase returns are.
What are Purchase Returns?
Purchase returns refer to the process of returning goods to a supplier for a refund or credit. This process is a crucial aspect of a company’s operations. Usually, companies offer purchase returns to ensure customer satisfaction and maintain a positive relationship with suppliers. However, they may come with specific terms, for example, coverage period, delivery charges, etc.
There are several reasons why customers may return goods, some of which include the following:
- The customer received damaged goods
- The supplier shipped the wrong items
- Customer changed their mind about a purchase
- Supplier offers free returns within a specific period
Usually, companies that accept returns issue a credit note in exchange for the goods received. This credit note acts as the supporting document for the accounting for this process.
What is the accounting for Purchase Returns?
The accounting for purchase returns involves making adjustments to the accounts related to the original purchase transaction. It implies debiting the supplier account to whom a company owes money for credit purchases. However, companies can only do so when they receive a credit note from the supplier, as mentioned above.
When a company returns goods to a supplier, it must also record the transaction as a purchase return. It is a separate account that falls under a contra-expense account. At the end of every financial period, companies report their purchases and decrease the value of returns from them. Usually, this account only impacts the income statement.
What is the journal entry for Purchase Returns?
The journal entry for purchase returns involves debiting the supplier account while crediting purchase returns. This entry looks as follows.
| Dr | Supplier account (Accounts payable) |
| Cr | Purchase returns |
However, the above journal entry is for when companies still haven’t paid the original payable amount. If a company has settled the transaction, it must record a receivable from the supplier. Once again, the supporting document for this journal entry will be the credit note. The accounting entry to record it is as follows.
| Dr | Supplier account (Accounts receivable) |
| Cr | Purchase returns |
Example
A company, Red Co., purchased goods worth $10,000 from its supplier Blue Co. The company received an invoice for this transaction and recorded it as follows.
| Dr | Purchases | $10,000 |
| Cr | Blue Co. (Accounts payable) | $10,000 |
A few days later, Red Co. inspected some goods received for that order and found damages. The company returned $3,000 worth of goods to Blue Co., for which it also received a credit note. Red Co. recorded the transaction as follows.
| Dr | Blue Co. (Accounts payable) | $3,000 |
| Cr | Purchase returns | $3,000 |
Conclusion
Purchase returns occur when a company returns goods received from a supplier. However, they must also get a credit note from the supplier to record it. This step is crucial in accounting for purchase returns. Companies may return goods to their suppliers for several reasons. However, the contract between both parties must allow it.
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