Introduction
When a business returns goods to a supplier, a Purchase Return occurs. These transactions are recorded in the accounting books to reverse the original purchase entry and adjust the inventory and accounts payable accordingly. Proper documentation and journal entries are essential for accurate financial reporting and compliance.
In this guide, we’ll dive into the concept of purchase return journal entries, why they are important, and how to record them with practical examples and tables.
What is a Purchase Return?
A Purchase Return happens when a business sends back purchased goods to the supplier due to defects, incorrect items, or other reasons. These returns affect the inventory, accounts payable, and possibly the GST/VAT (if applicable).
The Importance of Recording Purchase Returns
- Accurate Financial Reporting: Ensures your financial records reflect the true state of inventory and liabilities.
- Compliance: Helps in adhering to tax regulations by adjusting input tax credits for the returned goods.
- Stock Management: Updates inventory levels correctly.
Journal Entries for Purchase Return
The journal entries depend on whether the purchase was made on credit or with cash. Here’s how to record a purchase return:
1. Purchase Return on Credit
If goods were purchased on credit and returned, the entry will reverse the original purchase entry.
Journal Entry:
| Account | Debit / Credit | Amount |
|---|---|---|
| Accounts Payable | Debit | $X |
| Purchase Return (Expense or Contra-Purchase Account) | Credit | $X |
Example: Goods worth $500 were returned to a supplier. These goods were initially purchased on credit.
| Account | Debit / Credit | Amount |
|---|---|---|
| Accounts Payable | Debit | $500 |
| Purchase Return | Credit | $500 |
2. Purchase Return with GST/VAT Adjustments
If the purchase included GST/VAT, the return will also need adjustments for the tax.
Journal Entry:
| Account | Debit / Credit | Amount |
|---|---|---|
| Accounts Payable | Debit | $X (including tax) |
| Purchase Return | Credit | $Y (excluding tax) |
| Input GST/VAT | Credit | $Z (tax portion) |
Example: Goods worth $1,000 (inclusive of 10% GST) were returned to the supplier.
| Account | Debit / Credit | Amount |
|---|---|---|
| Accounts Payable | Debit | $1,000 |
| Purchase Return | Credit | $909.09 |
| Input GST (10%) | Credit | $90.91 |
3. Purchase Return Paid in Cash
If the original purchase was paid in cash, the journal entry for the return would adjust the cash account instead of accounts payable.
Journal Entry:
| Account | Debit / Credit | Amount |
|---|---|---|
| Cash/Bank Account | Debit | $X |
| Purchase Return | Credit | $X |
Example: Goods worth $300 were returned, and a cash refund was received.
| Account | Debit / Credit | Amount |
|---|---|---|
| Cash | Debit | $300 |
| Purchase Return | Credit | $300 |
Summary Table of Purchase Return Scenarios
| Scenario | Debit Account | Credit Account |
|---|---|---|
| Credit Purchase Return | Accounts Payable | Purchase Return |
| Credit Purchase Return with Tax | Accounts Payable | Purchase Return + GST |
| Cash Purchase Return | Cash/Bank | Purchase Return |
Conclusion
Purchase returns are common in business transactions and must be handled with proper journal entries to maintain financial accuracy. Whether you’re dealing with returns on credit, cash, or tax-inclusive purchases, understanding the right entries ensures compliance and accurate reporting.
By mastering purchase return journal entries, you can improve your accounting processes and maintain a clear financial picture.
