Purchase Return: Debit or Credit? Journal Entry with Examples

A purchase return is recorded as a credit. When you send goods back to a supplier, you debit the supplier (Accounts Payable, or Cash if they refund you) and credit Purchase Returns. Purchase Returns is a contra account to Purchases, so it carries a credit balance and appears on the credit side of the trial balance.

The rest of this guide shows the journal entry step by step, with balanced examples for credit purchases, cash purchases and returns that include GST/VAT.

Purchase return: debit or credit? Quick answer

Account	Debit or credit	Why
Purchase Returns (or Purchase Returns and Allowances)	Credit	It reduces the cost of purchases, so it works against the debit balance in Purchases.
Accounts Payable (the supplier)	Debit	You now owe the supplier less.
Cash / Bank (if refunded)	Debit	Cash comes back to you.
Input GST/VAT (if tax was charged)	Credit	You reverse the tax credit you claimed on the original purchase.
Inventory (perpetual system only)	Credit	Stock on hand goes down.

What is a purchase return?

A purchase return happens when a buyer sends goods back to the supplier because they are damaged, defective, the wrong item, or not needed. It reduces both what you owe (if you bought on credit) and the amount you spent on purchases.

In practice, the buyer raises a debit note to tell the supplier which goods are going back and the value. The supplier confirms the return with a credit note. That credit note is also the document that adjusts tax, so check your local rules for how returns are documented.

Which method do you use: periodic or perpetual?

The entry depends on how you track inventory. Do not mix the two in the same entry, or your debits and credits will not balance.

Inventory system	Debit	Credit
Periodic (stock counted at period end)	Accounts Payable or Cash	Purchase Returns
Perpetual (stock updated with every transaction)	Accounts Payable or Cash	Inventory

Under a perpetual system there is usually no separate Purchase Returns account, because the return reduces Inventory directly. The examples below show both.

Steps to record a purchase return

1. Work out the value of the return, including any tax that was charged on the returned goods.
2. Decide where the other side of the entry goes. Accounts Payable if you bought on credit and haven't paid; Cash or Bank if the supplier refunds you.
3. Debit that account for the full value of the return.
4. Credit Purchase Returns (periodic) or Inventory (perpetual) for the value of the goods, and credit Input GST/VAT for the tax portion.
5. Check that total debits equal total credits.

Example 1: Return of goods bought on credit

ABC Traders buys $1,000 of goods on credit and returns $200 of damaged items.

Periodic system

Account	Debit	Credit
Accounts Payable	$200
Purchase Returns		$200

Perpetual system

Account	Debit	Credit
Accounts Payable	$200
Inventory		$200

Accounts Payable is debited because the liability to the supplier falls from $1,000 to $800. The credit is either Purchase Returns or Inventory, never both.

Example 2: Return of goods bought for cash, with a refund

XYZ Ltd pays $500 cash for goods and returns $100 of defective items. The supplier refunds the $100.

Account	Debit	Credit
Cash	$100
Purchase Returns (periodic) or Inventory (perpetual)		$100

Cash is debited because money comes back into the business.

Example 3: Return that includes GST/VAT

A business returns goods with a value of $200 on which 10% tax ($20) was charged, so the total value of the return is $220. It had bought on credit.

Account	Debit	Credit
Accounts Payable	$220
Purchase Returns (periodic) or Inventory (perpetual)		$200
Input GST/VAT		$20

The supplier is debited for the full $220 you no longer owe. The $20 credit to Input GST/VAT reverses the tax credit you claimed when you bought the goods.

How purchase returns show up in your financial statements

• Trial balance: Purchase Returns appears on the credit side.
• Income statement: Purchases minus Purchase Returns gives net purchases, which feeds the cost of goods sold calculation.
• Balance sheet: Accounts Payable is lower (or cash is higher), and under a perpetual system Inventory is lower.

Common mistakes

• Crediting both Inventory and Purchase Returns for the same return. Pick one, based on your inventory system.
• Forgetting the tax. If the original purchase had GST/VAT, the return must reverse the input tax.
• Recording a return as a negative purchase in the purchases account, which hides how much you return and makes supplier quality problems harder to spot.
• Not matching the return to a debit note or credit note, so the books and the supplier's statement disagree.

Related guides

• Purchase return journal entries: a summary table of scenarios
• Effective purchase return management: best practices
• Zetran's explainer on purchase returns and allowances journal entries

FAQs

Is purchase return a debit or credit?

Credit. The Purchase Returns account has a credit balance, while the supplier's account (Accounts Payable) is debited.

Is purchase return an expense, asset or liability?

It is a contra account to Purchases, so it reduces the cost of goods you bought. It is not an asset or a liability.

Is purchase return a debit note or a credit note?

The buyer sends a debit note to the supplier for the returned goods, and the supplier answers with a credit note. In your books, you debit the supplier and credit Purchase Returns.

Where does purchase return appear in the trial balance?

On the credit side.

What is the difference between purchase return and sales return?

A purchase return is goods you send back to a supplier, recorded as a credit to Purchase Returns. A sales return is goods a customer sends back to you, recorded as a debit to Sales Returns.