Returns Outward: Definition
Merchandise that is returned to suppliers is known as returns outward.
If merchandise purchased are not received according to specifications or if they are defective, buyer can return them to the seller or ask the seller for an allowance (e.g., reduction in price).
To record such returns and allowances, the purchase returns and allowances account is used in the buyer’s books.
Returns Outward: Explanation
If goods are returned to a supplier, or if an invoice received from the supplier has an overcharge, a credit note would be sought to rectify the situation.
All credit notes received from the supplier are entered in the returns outward book. The entries are listed 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 returns outward book for convenience in filing and reference.
Example: Recording Transactions in the Returns Outward Book
This example shows how to record the following transactions in John’s returns outward book.
- July 3: Received a credit note (No. 7674) from Harry for $760
- July 7: Received a credit note (No. 161) from ZB Wholesalers for $460
- July 14: Received credit note (No. 786) from Muller for $570
- July 22: Received credit note (No. 5541) from AN Traders for $920
The returns outward book 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 the supplier, it is necessary to make two journal entries.
In the first entry, we debit the accounts receivable account and credit the purchase returns and allowances account. This entry is made to recognize the return of merchandise.
In the second entry, we debit the cash account and the credit accounts receivable account. This entry is made when a refund is received from the supplier for the returned merchandise.
Example
On 1 April 2016, Y Merchants purchased merchandise for $2,500 in cash from Z Traders.
Upon delivery, Y Merchants found serious defects in the items, meaning that they could not be sold to customers. Y Merchants returned the merchandise to Z Traders on the same day.
On 2 April 2016, Z Traders returned the full amount in cash to Y Merchants.
Required: Make a journal entry in the books of Y Merchants that records:
- The purchase of merchandise from Z Traders
- The returns outward
- The receipt of refund of cash for goods returned to Z Traders
Solution
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.
Example
On 1 April 2016, Y Merchants purchased merchandise for $2,500 on account from Z Traders.
Upon delivery, Y Merchants found that the merchandise was defective and, therefore, could not sell it to customers. Y Merchants returned the merchandise to Z Traders on the same day.
Required: How would you journalize the above transactions in the books of Y Merchants?
Solution
Connect to a Financial Advisor
We hope we have provided you with sufficient information about the proper accounting treatment for returns outward. If you have any more questions, we’d be happy to refer you to a financial advisor in Ada County, ID. For those of you who live outside the vicinity, please visit our financial advisor page.
