Purchase Returns or return outwards can be seen as a process where goods are returned to the supplier because of being defected or damaged.
Therefore, the supplier has to receive those goods back and make the subsequent entry in their accounts and ledgers to ensure that they can maximize the overall returns.
In the case of purchase returns, it can be seen that goods are returned to the supplier and subsequently recorded in General Ledger under the account of Purchase Returns.
The purchase returns account will always have a credit balance. The Debit Balance will then offset this credit balance in the Purchase Account.
Purchase Returns Account is a contra-expense account; therefore, it can never have a debit balance. The balance will either be zero or credit.
The main premise behind accounting for purchase returns is to reflect the books as if no purchase had been originally made.
Hence, the overall value of the goods that are recorded is essentially deducted from the purchases that have been made.
Therefore, there is a need to take the overall system step by step instead of ensuring that the overall reversal has been carried out. The overall impact of the purchase has been minimized to a maximum extent.
The main reason for not deducting it directly from purchases is to keep the accounting records properly maintained for auditing and internal controls.
Firstly, there is a need to debit account payables and credit purchase returns. It can be seen that Debiting Payables is a reduction in liability, whereas crediting purchase returns is a decrease in expense.
This is because Payables was initially a liability that the business had incurred against purchasing certain goods and services.
On the other hand, it was also a probable expense that was likely to be incurred due to paying back for the goods and services that the company had purchased.
The Journal Entry for Purchase Returns is shown as follows:
Debit – Account Payables (Payable)
Credit – Purchase Returns (Payable)
The treatment mentioned above is mainly for the scenario where the purchase had been made on credit.
However, if the purchase was made in cash, it can be seen that Cash would have been debited (because the company would have received cash against the returned purchase material). Purchases Return would have been credited (since it is a decrease in expense for the company).
For example, a company ABC has to return goods worth $ 1500 to their supplier, XYZ. The journal entry to record this transaction would be as follows:
Debit – Account Payables (XYZ) 1500
Credit – Purchase Returns (XYZ) 1500
All balances in the Purchase Returns Accounts are settled off at the year-end and not are usually not carried on to the next year.
Therefore, to summarize the explanation given above, it can be seen that Purchase Returns is an accounting concept which reflects the return of goods to their supplier because of legitimate concern. The journal entry to record this transaction is to Debit Payables and Credit Purchase Returns.