written by | May 30, 2022

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What is Purchase Return Journal Entry? Explained

When goods bought with credit have to be returned to the seller, and the supplier, the details for such transactions are noted in the purchase return book or the purchase return daybook. The goods purchased can be returned to the purchaser because of defects or poor quality. A separate book is kept for these returns as the returns aren't included in the purchase amount in the purchase book.

This book is called a purchase return journal, and when any sold item is returned, an entry is made in this journal, which is called a purchase return journal entry.

Did you know?

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What is the Purchase Return Journal Entry?

Many businesses struggle with this very common entry. This journal entry aims to record purchases and returns for sales. But what is it exactly, and how do you create it? 

Here are some examples of purchase return journal entries. The first example shows the reduction in net sales of a business from a purchase. Let's assume you purchased goods worth ₹1,50,000 on the 1st of September, paid cash and returned them on the thirteenth. To record the purchase and return of goods, you need to record these two transactions. The purchase return is negative because the original purchase was made in cash. It means that the seller can expect immediate payment.

The seller must write this amount on the income statement and journal entry. Alternatively, he can offer a discount if the buyer pays in cash. In either case, you must note the discount on the income statement. If the buyer doesn't pay in cash, he may return the goods. The debit to the account marked as receivable indicates a decrease in the amount of money in the company's cash. A purchase return is another important journal entry that is often overlooked—this type of journal entry records when a purchaser returns a product.

In many cases, the purchase return is made on account of a defect, poor quality, or incorrect specification. Either way, the company must account for the returned goods. The customer may receive compensation for returning goods. It will also be recorded in the same accounts as the original purchase.

Also Read: How to Enter Sales Return Entry in Tally ERP 9?

How to Make Journal Entries of Purchase Return?

In the system of periodicity under the periodic system, the business must complete an entry in the journal of purchase entries. It's possible to do so by debiting cash or accounts payable accounts and crediting purchase returns and allowances accounts.

Account

Debit

Credit

Cash and accounts payable

000

 

Returns on purchases and allowances

 

000

The allowances and purchase returns are a loan account that normally has its balance in the direction of credit. The purchase account will offset the balances in this account, and it will then be eliminated when the company closes the accounts at the close of the period.

Similar to this entry in the journal, there's no inventory account to account for. The company doesn't keep track of inventory when it enters journal entries because of the periodic system.

Perpetual Inventory System

Under the perpetual system, companies can enter purchases and return journal entries by debiting accounts payable or cash accounts and crediting accounts for inventory.

Account

Debit

Credit

Cash and accounts payable

000

 

Inventory

 

000

The journal entries in this entry show that the business directly reverses inventory to the value of the returned apparel. The company doesn't need to establish an account for allowances and purchase returns to record transactions like those used in the inventory cycle system. This is because, under the perpetual system, when the business purchases items, it doesn't keep track of the account for the purchase (nor does it have a purchase account). However, it can directly debit an inventory account. Therefore, when the items are returned, inventory needs to be reduced.

Purchase Return Journal Entry Example 

Considering that the company ABC. is involved in the below-mentioned following transaction for the year 2021.

 We’ve included companies 1, 2, 3 and 4 in the example.  

  • Oct 03: Company ABC bought apparel on account from company 1 with invoice number 303 for ₹951
  • Oct 13: Company ABC bought apparel on account from company 2 with invoice number 313 for ₹2700 
  • Oct 15: Company ABC returned apparels to corporation 1 worth ₹300, Debit memo No. 853.
  • Oct 17: Company ABC bought apparel on account from company 3 with invoice number 320 for ₹400.
  • Oct 20: Company ABC bought apparel on account from company 1 with invoice number 343 for ₹550.
  • Oct 15: Company ABC returned apparels to corporation 3 worth ₹245, Debit memo No. 854. 

This data transaction information mentioned above is recorded both on the purchases journals and allowances journal.  Update all these entries on the general and subsidiary ledger of account payable.

Purchase returns and purchase journal and allowances journal:

Purchase Journal

Date 2021

Account Debited

Invoice Number

PR

Amount (₹)

3 Oct

Company 1

303

73

₹ 951

13 Oct

Company 2

313

76

₹ 2700

17 Oct

Company 3

320

77

₹ 400

20 Oct

Company 1

343

73

₹ 550

30 Oct                    Total Amount transferred to purchase account                     ₹ 4601

Purchase Journal

Date

Account Debited

Debit Memo Number

PR

Amount (₹)

17 Oct

Company 1 

853

73

₹ 300

22 Oct

Company 3

854

77

₹ 245

30 Oct          Total transferred to purchase returns and allowances account       ₹ 145

Advantages of Purchase Return Journal Entry

Using the purchase return journal entry is advantageous for many reasons.

  • The process helps record the sale made by the customer. For example, when a T-shirt printing company buys bulk shirts on credit, they do not pay for them in full up-front. Instead, they will pay in instalments. 
  • In some cases, the customer may return the items debited from accounts payable and credited to purchase returns.
  • Another advantage of the purchase return journal entry is that it reduces the inventory balance. 
  • It can also help determine the actual inventory balance. 
  • Accounting mistakes can lead to the wrong impression of a company. The recording process can be very time-consuming, especially if many returns are made. However, this task is worth it if you're looking to improve your brand loyalty and increase revenue.
  • The customer's name and address are recorded using the purchase return journal entry. The vendor can use this information to revise their revenue. 
  • The buyer can also use this information to determine whether the goods returned were cash sales or not. 
  • Another advantage of purchasing goods in bulk is that the seller gets paid in cash upfront. This is beneficial to both the buyer and the seller because he can expect to receive immediate payment. He must then debit his account payable, credit his accounts receivable and record the discount. 
  • The discount can be calculated, and the buyer's income statement will reflect the discount. 

Also Read: What does Books of Original Entry mean?

Disadvantages of Purchase Return Journal Entry

Here are some of the disadvantages of this method. 

  • Unlike sales transactions, a purchase return requires reverse accounting. Credits increase some accounts; debits decrease others. Hence, a purchase return lowers net sales. 
  • If you are in the business of selling products on credit, you should use this method. It will save you time and effort. However, it can be confusing.
  • One of the major disadvantages of purchasing a return journal entry is its human factor. As the purchase return is recorded manually, a human could make a mistake and thus create a false impression about your company. 
  • Recording a large number of returns may be time-consuming. Therefore, purchasing journal entries is often not an option for a company with many returns. 
  • In case of a customer return, the seller may choose to refund the purchase and resell it. In this case, he may change the product or even return it to the supplier. As a result, the account payable will be reduced. On the other hand, a purchase return will reduce your expenses and liabilities.

Unlike the sales return, a purchase return will not reduce your cash inventory. A purchase return is also an opportunity to record an adjustment. The cost of goods sold will reduce the expense incurred on the return. Similarly, a purchase return will increase your apparel inventory. This is why the benefits of this journal entry outweigh the negatives. This method will save you time in the long run.

Conclusion

The Journal entry process isn't in any way daunting. Today, much software is available, which makes the journal entry process effective and easy. If the online payment transaction wastes a lot of time, you can Log in and use free platforms like Khatabook.
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FAQs

Q: Why is the purchase return debit?

Ans:

The goods' seller can issue it. The goods' purchaser will issue a note for debit to the seller to notify them to return the goods they received. This can be due to poor quality or damage issues.

Q: What is the purchase return entry meaning?

Ans:

A purchase return occurs when a purchaser of inventory, fixed assets, merchandise, or other items sends such goods back to the seller.

Q: What are journal entries of purchase return?

Ans:

When the goods are returned to the supplier, the payable money account for the money/credit purchases will be debited respectively with a corresponding credit to the buy return account. It is because the goods return from the organisation to the supplier.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.