In accounting, return outward is also known as purchase returns. It refers to goods purchased by a buyer being returned to the supplier. The goods may be defective, damaged, inappropriate, or not in the same quantity as the invoice.
We discuss the meaning and importance of purchase returns for businesses and students. We also present an example and journal entries for better understanding.
What Is Return Outward in Accounting?
Return outward is a term used when goods previously purchased by a business are returned to a supplier. In some cases, the value of goods is deducted from what the business owes the supplier. If the payment for the goods has already been made, the supplier refunds the amount.
For example, if a shop purchases a hundred notebooks from a wholesaler and later returns ten notebooks because they are damaged, the return outward will take place.
This means the total purchases the business makes will be reduced by the value of the returned notebooks.
Return outward usually applies to goods that have been purchased by a business for resale. It contrasts with return inward, which applies to goods that a customer buys from a business and later returns.
Why Is Return Outward Called Purchase Returns?
The phrase purchase returns is a more precise description of the nature of this transaction. That is why return outward is another name for purchase returns. In accounting, purchase returns record goods returned to a supplier.
Both phrases, return outward and purchase returns, mean the same thing. However, in a traditional sense, purchase returns is a term mostly used in bookkeeping.
Without purchase returns records, businesses cannot ensure that their purchases are correctly valued. This, in turn, can lead to errors and misstatements in the final accounts.
How Is Return Outward Recorded?
Purchase returns are usually recorded in a separate Purchase Returns Account in the books of accounts.
Journal Entry
The journal entry for goods returned to a supplier on credit is:
- Debit: Supplier’s Account or Accounts Payable
- Credit: Purchase Returns Account
For instance, if goods costing $200 are returned to a supplier on credit:
Accounts Payable $200 Purchase Returns $200
Note: In some cases, accounts payable might be used instead of the supplier’s account.
Purchase returns can be offset against cash if the payment was made to the supplier. Alternatively, the supplier can give a credit to the business on account. The credit note from the supplier reduces the amount that the business owes the supplier.
What Are the Effects of Return Outward on Financial Statements?
Purchase returns affect the calculation of net purchases since the value of goods returned is subtracted from total purchases made.
Net purchases are calculated as:
Net purchases = Total purchases – Purchase returns – Purchase discounts + Transportation-in or carriage-in
For example, if a company has $5,000 in purchases and returns goods worth $500, it means the purchases the business made amounted to $4,500 after purchase returns and allowances.
In conclusion, purchase returns records enable a business to determine its cost of goods sold (COGS) and inventory costs. In essence, proper purchase returns management ensures that a business’s expenditures on inventory are correct.
Reasons Why a Business Might Make a Return Outward
A business might decide to make a return outward for several reasons. Some of the reasons include:
- The goods purchased were defective, damaged, or not in the same quantity as the invoice.
- The goods purchased do not meet the buyer’s standards.
- The supplier misdelivered the goods.
- The goods underwent quality inspection and failed to pass the test.
To keep track of all the purchase returns, businesses must store invoices, delivery notes, return authorizations, and credit notes. The documents will help the business retrieve information on purchases, deliveries, and credits it has allowed to customers.
Return Inward vs. Return Outward
Return inward and return outward are phrases used to describe the two sides of a sale. In essence, return outward is when a business returns goods it purchased to a supplier. By contrast, return inward is when a business allows a customer to return goods that it sold to the customer.