Journal entry for purchases return (returns outwards)

What is Return Outwards? – Definition

Merchandise being returned to suppliers are also termed as “returns outwards“. If merchandise purchased are not according to specification or they are defective, buyer may return them to the seller or ask him for an allowance (reduction in price). To record such returns and allowances, an account is known as “purchases returns and allowances” is used in the books of the buyer.

Explanation

If goods are returned to a supplier, or if an invoice received from him has an over-charge, a credit note would be sought and received from such a supplier to rectify the situation. All credit notes received from the supplier are entered in the return outwards book, in more or less the same manner as invoices received are entered in the purchases book. As the various credit notes may bear different serial numbers, these are re-numbered at the time of making entries in the return outwards book for convenience in filing and reference.

Example (Recording Transaction in the Return Outwards Books)

Record the following transaction in the return outwards book of John.
July 3:

• Received a credit note (No. 7674) from Harry, $760.

July 7:

• Received a credit note (No. 161) from ZB Wholesalers, $460

July 14:

• Received credit not  (no. 786) from Muller, $570

July 22:

• Received credit note (No. 5541) from AN Traders, $920

The return outwards book of John will appear as follows:

Journal entry

The journal entries for the return of merchandise purchased for cash and merchandise purchased on account are different.

Return of merchandise purchased for cash

When merchandise purchased for cash are returned to supplier, we need to record two journal entries. In first entry we debit accounts receivable account and credit purchases returns and allowances account. This entry is made to recognize the return of merchandise. In second entry we debit cash account and credit accounts receivable account. This entry is made when a refund is received from supplier for merchandise returned to him.
Example:
On April 01, 2016, Y Merchants purchases merchandise for $2,500 cash from Z Traders. Upon delivery, Y Merchants finds that the merchandise have serious defects and cannot be sold to customers. Y Merchants returns the merchandise to Z Traders on the same day. On April 02, Z Traders returns the full amount of cash to Y Merchants.
Required: Make a journal entry in the books of Y Merchants:

1. to record the purchase of merchandise from Z Traders.
2. to record the returns outwards.
3. to record the receipt of refund of cash for goods returned to Z Traders.

Solution:

Return of merchandise purchased on account

When merchandise purchased on account are returned to supplier, we debit accounts payable account  and credit purchases returns and allowances account.
Example:
On April 01, 2016, Y Merchants purchases merchandise for $2,500 on account from Z Traders. Upon delivery, Y Merchants finds that the merchandise have serious defects and cannot be sold to customers. Y Merchants returns the merchandise to Z Traders on the same day.
Required: How would you journalize the above transactions in the books of Y Merchants?
Solution: