In which journal is the return of merchandise bought on account recorded?
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Sometimes, we may need to return the goods back to the supplier for some reason when the purchased goods are still in the return period. In this case, we need to make the journal entry for the goods returned to the supplier in order to record the cash refund or the credit we receive from the return transaction. Show
Additionally, if we use the perpetual inventory system in our business, we also need to update the inventory account as the transaction of the goods returned will reduce the balance of the inventory. On the other hand, if we use the periodic inventory system instead of the perpetual inventory system, we can just record the return transaction to the temporary account and net it off with the purchases account at the end of the accounting period. In business, there are several reasons that we, as the customers, may need to return the goods back to the supplier, including damaged goods, defective product or wrong specification. Likewise, the suppliers usually allow us to return back the purchased goods within a certain period of time. Journal entry for goods returned to supplierWe can make the journal entry for goods returned to the supplier by debiting the accounts payable or cash account and crediting the inventory account under the perpetual inventory system. Perpetual inventory system: AccountDebitCreditAccounts payable/cash$$$Inventory$$$In this journal entry, we directly credit the inventory account to deduct the balance of the inventory as a result of the goods being returned back to the supplier. This is due to, under the perpetual inventory system, we need to update the inventory perpetually (i.e. whenever there is an increase or a decrease of the inventory). On the other hand, if we use the periodic inventory system, we will record the goods returned to the supplier to the temporary account, e.g. purchase returns and allowances account, instead of recording it to the inventory account. Likewise, we can make the journal entry for goods returned to the supplier under the periodic inventory system with the debit of the accounts payable or cash account and the credit of the purchase returns and allowances account. Periodic inventory system: AccountDebitCreditAccounts payable/cash$$$Purchase returns and allowances$$$In this journal entry, the purchase returns and allowances account is a temporary account, in which its normal balance is on the credit side. This account will be cleared with the purchases account at the end of the accounting period. Example for goods returned to supplierFor example, on January 10, we have returned $5,000 goods to the supplier as they are still in the return period that is allowed by our supplier. We have purchased these $ 5,000 goods on credit from one of our suppliers last month. We use the perpetual inventory system in our business in order to manage and control the flow of the inventory goods in the accounting record. In this case, we can make the journal entry for the $5,000 goods returned to the supplier by debiting this amount to the accounts payable and crediting the same amount to the inventory account as below: January 10: AccountDebitCreditAccounts payable5,000Inventory5,000This journal entry will decrease both total assets and total liabilities on the balance sheet by $5,000 as a result of the goods returned back to the supplier. Example 2: For this example, assuming that we use the periodic inventory system in our business instead. If that is the case, the journal entry for the $5,000 goods returned to the supplier on January 10, will be as below instead: AccountDebitCreditAccounts payable5,000Purchase returns and allowances5,000In this journal entry, the $5,000 of the purchase returns and allowances will be cleared with the purchases account when we close the year-end account. It is an account that is paired with and neutralizes the purchases account in a periodic inventory method.
In simple terms, the purchase returns (which are called refunds) and allowances are issued by the suppliers, on originally purchased products for resale. When to make the journal entries here?When the goods purchased on the account are returned, or when there exists a request on allowance, the businessers will make the entry for this purpose as purchase return and allowance entry. DescriptionIn merchandising, when the customer returns the purchased single or multi-products or goods to the respective seller, it is the return occurring point.
In general, when the customer request to refund or price adjustment in the purchased product/products, the buyer will reach the supplier in writing. This type of information on writing is called a debit memo.
The debit memo is nothing but an information document shared by the product purchaser. The document holds the cost by which the purchaser offers to debit the seller’s account.
This document will act as a voucher for purchase return and allowance journal entry. And finally, all the received debit memos will be numbered in series.
 Accounting TreatmentThe purchase return and allowance accounting treatment is equivalent to sales return and allowance accounting treatment. The only difference between the both is, they involve different accounts.
For example, consider the XYZ company purchasing 10 refrigerators to resale for the total cost of $3000 in the future. Using the periodic inventory system, the businesses record their payable cost. It is documented as a record at the gross or invoice price.
If one of the purchased refrigerators is found bad and it is returned. The XYZ company will make the below entry,
The offset is made on purchase returns and allowances accounts against the entire purchases while estimating the COGS. Structure of purchase returns and allowances journal entriesHere follows the general structure of purchase returns and allowances journal entries below, Here follows the explanation for each of the above-mentioned columns,
Column 1 – DATE This column holds the date of the returned product to the supplier.
Column 2 – ACCOUNT DEBITED This column holds the supplier name to whom the product gets returned.
Column 3 – DEBIT MEMO NO. This column holds the record with the ID number of the respective debit memo.
Column 4 – P.R P.R stands for posting reference. The P.R column holds the history of the supplier account number. It presents the posted entry to the ledger account.
Column 5 – Amount This column holds the history of merchandise returned cost. Purchase returns and allowances journal entries exampleEntry created on purchase returns and allowances journal is published on account payable subsidiary ledger (i.e., it contains the detailed data backup as compared to the general ledger) and the general ledger.
Here follows the step-by-step process of the journal entry,
On the account payable subsidiary ledger, the respective cash amount is updated to the corresponding accounts debits.
The entire amount is updated as the accounts payable account debit. Further, posted as the credit in the general ledger. Purchase returns and allowances journal entries examplesLet us consider the company XYZ. It is engaged in the below following transaction for the year 2021.
(Here for an example, we included corporations 1, 2, 3, 4, …)
Aug 03: From corporation 1, company XYZ purchased merchandise on account, for $751, with invoice number 203.
Aug 13: From corporation 2, company XYZ purchased merchandise on account, for $2500, with invoice number 213.
Aug 15: Merchandise returned to corporation 1 – $100, Debit memo No. 743.
Aug 17: From corporation 3, company XYZ purchased merchandise on account, for $200, with invoice number 220.
Aug 20: From corporation 1, company XYZ purchased merchandise on account, for $350, with invoice number 243.
Aug 22: Merchandise returned to corporation 3 – $45, Debit memo No. 744. RequirementThe above data transaction information is recorded both on the purchase returns and allowances journal and the purchases journals. Update all the entries on the subsidiary and general ledger of account payable.
AnswersPurchase returns and allowances journal and purchase journal:Accounts payable subsidiary ledgerGeneral ledgerThe Final WordsTo make the journal entry process easy and effective, using software is the best option. mybooks is the best free accounting software to use with journal entries. Start for free! Purchase Return Journal Entry | FAQsIn trial balance, purchase returns are debit or credit?Purchase return will decrease the business expenditure. Thus, it will be put on the trial balance’s credit side. Does a purchase return an expense?Purchase return cannot be viewed as a business expense. It assists you in expense reduction in business. It can be viewed as a contra expense account. What’s the difference between sales return and purchase return?Here we have shared the major difference between sales return and purchase return.
What is the difference between purchase and purchase return?If a business purchases goods, those goods are entered in purchase books. If you return those purchased goods, then those will be entered in the purchase return book, as a note that the purchased goods are returned
Related ArticleSales Return Journal Entry | Explained with ExamplesIn terms of payroll journey, the sales return is that which ought to be helpful for the returning customers in account books. Read more What is the journal entry for returned merchandise?When merchandise is returned, the sales returns and allowances account is debited to reduce sales, and accounts receivable or cash is credited to refund cash or reduce what is owed by the customer. A second entry must also be made debiting inventory to put the returned items back.
How should a return of merchandise purchased on account be recorded?Return of Merchandise Purchased on Account
When merchandise purchased using an account are returned to a supplier, it is necessary to debit the accounts payable account and credit the purchase returns and allowances account.
What journal is purchase of merchandise on account?What is the journal entry for purchase of merchandise on account? The journal entry for purchase of merchandise on account is the same as the journal entry for purchase of merchandise for cash, except that the accounts payable account is credited instead of the cash account.
What accounts should be used to record the merchandise returned on account from the buyer?Well, there are a few accounts you may be dealing with when a customer returns merchandise:. Sales returns and allowances.. Accounts payable.. Accounts receivable.. Inventory.. Cost of goods sold.. |
