Whenever a business returns goods to a supplier, the accountant uses a purchase return journal entry for the record. The role of this entry is to ensure that financial records are accurate and up to date. A credit purchase return journal entry decreases the value of purchases in the records. It also changes how much the supplier is owed. What we call a return outward journal entry. When we reduce the purchase return with a journal entry, the supplier is debited, and the purchase return account is credited. This indicates that goods were returned and the purchase cost is decreased. Now, let us comprehend what a purchase return journal entry is and how this entry is recorded with detailed examples. Along with that, we will discuss the topic on purchase return accounting, purchase return meaning accounting and other basic terms related to the concept as well.
Meaning of Purchase Return Journal Entry
Purchase return journal entry is recorded when a business returns goods to seller. This can occur if the goods are damaged, extra or different from what was ordered. Such returns are referred to as return outward as movement of goods is outward from the buyer to the seller. In accounting, purchase return meaning is straightforward. It refers to the products that a company returns to the vendor after purchasing them. These are returns which decrease the quantity of purchases counted.
For this example, if a shop orders 10 boxes of pens but 2 boxes are damaged. Those 2 boxes are returned to that shop. This return will be made through a purchase return journal entry.
In this entry: The account of the supplier is debited. When goods are returned, the purchase return account is credited. This indicates that the business has no outstanding debt for the returned goods. And it also indicates that the company cut back on its purchases.
Reasons for Purchase Returns
There can be various reasons for purchase returns. Here are the most common:
- The items are damaged or defective.
- The goods are different from the sample or description.
- The company ordered excess inventory.
- The goods are received late.
- The wrong item was delivered.
Therefore, in case of goods return it is equally important to properly record them. This is an entry to update the journal to update the books. To know about purchase returns in accounting. Impact of purchase returns in accounting. A purchase return in accounting refers to the return of goods previously purchased, typically because they are defective or unsuitable for the intended use.
In accounting, the purchase return decreases the total purchase in the profit and loss account. If the payment is not paid by then, it would also decrease the liability of the balance sheet. It ensures the correctness of financial records. It also allows them to avoid over-reporting of expenses and liabilities. An entry for purchase return also aids in stock management. The stock level decreases when items are returned. Thus, the accounting entry needs to be synthesized too.
Journal Entry Format of Recording Purchase Return
The accountant needs to be aware of a few key things in order to record a journal entry for purchase return. which comprises return date, name of the supplier, value of goods returned, and GST or tax where applicable.Here’s the format to follow:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx/xx/xxxx | Supplier A/c Dr. | XXXX | ||
| To Purchase Return A/c | XXXX | |||
| (Being goods returned) |
This is the double entry system of the purchase return. There is one account debit, and one account credit.
Importance of Debit Note in Purchase Return
In Purchase Return debit note is used when goods of purchase are returned by buyer to seller. It indicates that the buyer is debiting the supplier’s account. This means that the buyer has lowered the payment. The debit note has:
- Date of return
- Supplier name
- Number and value of returns
- GST or tax breakup
- Sign of authorized personSignature.
This debit note will be a proof of return. Then the seller [counterpart] issues a credit note.
Goods Returned to Supplier (Including GST)
Suppose a shop returns goods of the value of ₹10,000 with 18% GST. The journal entry is:
Supplier A/c Dr. – ₹11,800
To Purchase Return A/c – ₹10,000
To Input CGST A/c – ₹900
To Input SGST A/c – ₹900
It indicates that the shop is lowering the purchase amount and is also adjusting the tax input credit.
Wen Should You Record Purchase Return Entry?
The journal entry for purchase return has to be made as soon as the return takes place. It is debited in the Purchase Return Book (Subsidiary Book). Then it gets added to the ledger. It has impact both on purchase account and supplier account.
- Data used for entry should be valid
- If applicable, add GST breakup.
- We should always follow the correct account heads.
- Debit note will be attached with the journal entry.
This helps the business keep proper records and comply with GST regulations.
Purchase Return Journal Entry In Accounting.
Now, let us see a few example entries of purchase return. That helps clarify how to use the rules in practice. Let us take examples of GST and non-GST supplies.
Illustration 1: Purchase Return without GST
Ram Traders sells goods worth ₹5,000 to a business on credit. Later, it returns damaged goods of worth ₹1,000. 3. Purchase return journal entry.
Ram Traders A/c Dr. – ₹1,000
To Purchase Return A/c – Rs 1,000
(Being good returned to supplier due to busted up)
This entry indicates that the balance of the supplier decreases to the extent of ₹1,000.
Example 2: Purchaser Return with the GST
From Mohan Suppliers, a business purchases items valued at ₹20,000 in addition to an 18% GST. It later returns merchandise valued at ₹5,000. GST is also reversed.
Mohan Suppliers A/c Dr. ₹5,9,000
To Purchase Return A/c — ₹5,000
To Input CGST A/c – ₹450
To Input SGST A/c – ₹450
(return of goods subject to reversal of GST)
We can see from above example how both purchase and Gst accounts can be adjusted.
Illustration 3: Purchase Return in Cash Transaction
A business purchases materials worth ₹3,000 by cash. It returns goods worth ₹500. The entry is:
Cash A/c Dr. – ₹500
To Purchase Return A/c – ₹500
(at the start of my role as returning goods and cash received)
In case of cash purchase, this is a purchase return entry.
Example 4: Full return Of Purchase
A vendor sells 100 chairs to a business for ₹50,000. All chairs were found defective and returned after inspection. The journal entry is:
Supplier A/c Dr. – ₹50,000
To Purchase Return A/c – ₹50,000.
(Damaged to the point of a full return)
This is a 100% return outward journal entry.
Key Notes from Examples
These examples aim to illustrate how to write a purchase return journal entry in various cases correctly. You will always debit the supplier or cash and credit the purchase return account. This approach works under the purchase return double entry system.
Relevance to ACCA Syllabus
In ACCA syllabus, purchase return journal entry is in Financial Accounting (FA) and Financial Reporting (FR). ACCA students are required to know how to identify and value purchase return correctly in the books of accounts. These entries impact both the income statement and balance sheet, and they are essential to follow according to IFRS standards. One important notion that ACCA will want you to know about is with regards to the fact that there are real life situations where we buy on credit, we buy and return items.
Purchase Return Journal Entry ACCA Questions
Q1. If we discuss purchase return journal entries then accounts to be credited are known as accounts payable or creditors.
A) Sales Account
B) Purchase Returns Account
C) Cash Account
D) Revenue Account
Ans: B Purchase Returns Account
Q2. What is a purchase return and how does it impact the financial statement?
A) Increases liabilities
B) Increases purchases
C) Decreases expenses
D) Increases income
Ans: C) Decreases expenses
Q3. What is the name of journal in which goods returned to suppliers recorded?
A) Sales Journal
B) General Journal
C) Purchase Return Journal
D) Purchase Journal
Ans: C) Purchase Return Journal
Q4. What is the proper double entry for a purchase return on credit?
A) for Debit of the Supplier and Credit of the Purchase return
B) Debit Supplier, Credit Debit Purchase Return
C) Purchase Debit, Supplier Credit
D) Debit Inventory Credit Purchase Return
Ans: A) Debit the Supplier and Credit Purchase Return
Q5. If using accrual accounting, when do purchase returns get recorded?
A) When goods are ordered
B) When payment is made
C) When goods are returned
D) At year-end only
Ans: Navigate to C) Upon return of goods
Relevance to US CMA Syllabus
In the US CMA (Certified Management Accountant) syllabus, purchase return journal entry falls under Part 1: Financial Planning, Performance, and Analytics. This subject relates to internal control, accurate recording of transactions, and cost management. So, all about how to make and adjust entries of purchase returns can help you in accounting financial statements accurately and assess the cost differences which is essential on managerial decision.
Purchase Return Journal Entry US CMA Questions
Q1. Where does the purchase return journal entry fall under the CMA syllabus?
A) Hughes International’s strategic financial management
B) Cost Management
C) Financial Reporting External to the Company
D) Risk Management
Ans: C) External Financial Reporting
Q2. Which account on the balance sheet will have a decrease with a purchase return entry?
A) Accounts Receivable
B) Inventory
C) Accounts Payable
D) Retained Earnings
Ans: B) Inventory
Q3. If a company returns inventory purchased on credit, which of the following is correct?
A) Debit Inventory
B) Debit Purchase Returns
C) Debit Accounts Payable
D) Credit Purchase Returns
Ans: C) Debit Account Payable
Q4. On which statement are purchase return adjustments reflected?
A) Balance Sheet only
B) Cash Flow Statement
C) Statement of Income and Statement of Financial Position
D) Statement of Equity
Ans: C) Income Statement & Balance Sheet
Q5. Identifying how to treat a purchase return in budgeting and variance analysis.
A) As a revenue
B) As a cost reduction
C) As an asset
D) As depreciation
Ans: B) As a cost reduction
Relevance to US CPA Exam
The purchase return journal entry is part of the US CPA exam FAR section. Under US GAAP, CPA candidates apply knowledge of how returns affect inventory, payables, and expenses. Purchase returns knowledge helps in ensuring correct recording and compliance, which is vital for audit preparedness and accuracy in financial reporting.
Purchase Return Journal Entry US CPA Questions
Q1. How do i record a purchase return under US GAAP?
A) As a liability
B) As a contra-expense
C) As a revenue
D) As depreciation
Ans: B) As a contra-expense
Q2. Suppose goods of $2,000 are returned, what happens?
A) accounts payable increase
B) Reduction in Purchase Returns
C) Reduce Inventory And Accounts Payable
D) Increase in Sales
Ans : C) Decrease in Inventory and Accounts Payable
Q3. Which journal is used to record the routine return of purchases?
A) Sales Return Journal
B) Cash Book
C) Purchase Return Journal
D) General Journal
Ans: C) Purchase Return Journal
Q4. What is the correct accounting treatment when goods purchased on credit are returned to the supplier?
A) Inventory is adjusted directly
B) Credit the Purchase Returns account
C) Debit Accounts Receivable
D) Debit Purchase A/c
Ans: B) Credit the Purchase Returns account
Q5. How does a purchase return affect the trial balance?
A) It has no effect
B) It increases liabilities
C) It decreases debit balance of Purchases
D) It increases equity
Ans: C) It decrease debit balance of Purchases
Relevance to CFA Syllabus
This topic is related to inventory management and financial statement analysis, particularly in the CFA Program, Level 1 Financial Reporting and Analysis. While CFA candidates will need to interpret the impact of purchase returns on cost of goods sold, net income, and working capital, they will not need to prepare entries. The impact of such knowledge is significant when analysing financial statements and making investment decisions.
Purchase Return Journal Entry CFA Questions
Q1. What is the impact of a purchase return on financial ratios?
A) Increases Current Ratio
B) Decreases Gross Margin
C) Improves Inventory Turnover
D) Decreases Working Capital
Ans: C) Improves the Inventory Turnover
Q2. Here are the following result of the decrease in purchases due to returns:
A) Higher COGS
B) Lower Inventory
C) Lower Expenses
D) Higher Liabilities
Ans: C) Lower Expenses
Q3. How does a purchase return affect the balance sheet?
A) Increases inventory
B) Decreases inventory and accounts payable
C) Which increases retained earnings
D) Has no impact
Ans: B) inventory and accounts payable decreases
Q4. Q: What is the probable impact of frequent purchase returns?
A) Supplier relationship status improved
B) bad inventory or ordering mistakes
C) Increased revenue
D) Decreased fixed assets
Ans: B)Inventory quality or ordering mistakes
Q5. What minor statements do purchase returns affect?
A) Operating expenses only
B) Equity section
C) Sales and Inventory
D) Financing activities
Ans: C) Cost of Goods Sold and Inventory
