Purchases Returns

Purchases Returns Supplier Inventory Management Accounting Faulty Goods Return Policy Purchases Journal
Purchases returns are goods purchased from a supplier that are returned due to being faulty, incorrect, or not meeting specifications.
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Definition

Purchases returns refer to goods that a company has purchased from a supplier but has subsequently returned to the supplier. The reasons for these returns can include the goods being faulty, not matching the order specifications, damaged during transit, or not being needed anymore. When purchases are returned, they are deducted from the total purchases and recorded as purchases returns in the company’s accounting books.

Examples

  1. Faulty Goods: A company receives 100 units of electronic components, but upon inspection, finds that 20 units are defective. The company returns these 20 units to the supplier and records this as a purchase return.
  2. Incorrect Order: An organization orders 50 units of a specific part but receives a different one. It returns the incorrect goods to the supplier and documents this transaction as a purchase return.
  3. Excess Stock: A business overestimates the quantity needed for a project and ends up with excess inventory. It returns the surplus to the supplier and records the return in its accounting system.

Frequently Asked Questions (FAQs)

Q1: How are purchases returns recorded in the accounting books?

  • Purchases returns are typically recorded in a Purchases Returns and Allowances account, which is a contra account that reduces the total purchases.

Q2: What is the impact of purchases returns on financial statements?

  • Purchases returns decrease both the total purchases and accounts payable, leading to a lower cost of goods sold and improved inventory levels.

Q3: Is there a difference between sales returns and purchases returns?

  • Yes, sales returns refer to goods returned by customers to the business, while purchases returns refer to goods that a business returns to its suppliers.

Q4: How do purchases returns affect the net purchases figure?

  • Net purchases are calculated by subtracting purchases returns (and allowances) from total gross purchases.

Q5: Why is it important to keep accurate records of purchases returns?

  • Accurate records help maintain inventory control, ensure correct financial reporting, and facilitate supplier reconciliation.
  • Sales Returns: Goods that customers return to the business. These are recorded in a Sales Returns and Allowances account.
  • Inventory Management: The process of ordering, storing, using, and selling a company’s inventory, including raw materials, components, and finished products.
  • Purchases Journal: A special journal used to record all credit purchases of a business.
  • Contra Account: An account that reduces a related account on a financial statement. For example, purchases returns is a contra account to purchases.

Online References

  1. Investopedia: Purchases Returns Definition
  2. The Balance: Recording Purchases Returns
  3. Accounting Coach: Explanation of Purchases Returns

Suggested Books for Further Studies

  1. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
  2. “Financial Accounting” by Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
  3. “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso

Accounting Basics: “Purchases Returns” Fundamentals Quiz

### What type of account is used to record purchases returns? - [x] Contra account - [ ] Asset account - [ ] Expense account - [ ] Revenue account > **Explanation:** Purchases returns are recorded in a contra account, which reduces the total purchases on the financial statements. ### When goods are returned to the supplier, what happens to the accounts payable? - [x] Decreases - [ ] Increases - [ ] Stays the same - [ ] Doubles > **Explanation:** When purchases returns are recorded, accounts payable decrease because the liability to the supplier is reduced. ### What impact do purchases returns have on the cost of goods sold (COGS)? - [x] Decrease COGS - [ ] Increase COGS - [ ] No impact - [ ] Double COGS > **Explanation:** Purchases returns reduce the total purchases, which in turn decreases the cost of goods sold (COGS). ### Is a purchases return recorded in the assets section of the balance sheet? - [ ] Yes - [x] No - [ ] Sometimes - [ ] It depends > **Explanation:** Purchases returns are not recorded under the assets section of the balance sheet. They are recorded as a reduction in purchases in the income statement. ### Which financial statement will reflect the effect of purchases returns directly? - [x] Income statement - [ ] Balance sheet - [ ] Cash flow statement - [ ] Statement of changes in equity > **Explanation:** The effect of purchases returns is directly reflected in the income statement as it reduces total purchases, impacting the net purchases figure. ### What happens to inventory levels when purchases are returned to the supplier? - [x] Decrease - [ ] Increase - [ ] Stay the same - [ ] Fluctuate unpredictably > **Explanation:** Returning purchases to the supplier decreases the inventory levels as those goods are removed from the inventory. ### How do purchases returns impact net purchases? - [x] Net purchases decrease - [ ] Net purchases increase - [ ] Net purchases remain constant - [ ] No direct impact > **Explanation:** Net purchases decrease because they are calculated by subtracting purchases returns and allowances from total gross purchases. ### What happens to the purchases returns and allowances account when goods are returned to the supplier? - [x] It is credited - [ ] It is debited - [ ] It remains unchanged - [ ] It is closed > **Explanation:** The purchases returns and allowances account is credited when goods are returned to reduce the total amount of purchases recorded. ### In an accrual accounting system, when should purchases returns be recorded? - [x] When the goods are returned - [ ] At the end of the fiscal year - [ ] When the return is anticipated - [ ] When the supplier agrees to accept them > **Explanation:** In an accrual accounting system, purchases returns should be recorded at the time the goods are returned to accurately reflect the transaction. ### Are purchases returns included in the purchases journal? - [x] No, they are recorded in a separate returns journal - [ ] Yes, always - [ ] Only for cash purchases - [ ] Only for credit purchases > **Explanation:** Purchases returns are typically recorded in a separate purchases returns journal to clearly differentiate between new purchases and returns.

Thank you for deepening your understanding of purchases returns and tackling our comprehensive quiz! Keep developing your accounting expertise!

Tuesday, August 6, 2024
Purchasing Power
Purchases Ledger Control Account
Average Cost (AVCO) January 1, 1
Commodity Code January 1, 1
Cost of Goods Sold (COGS) January 1, 1
FIFO Cost (First-In-First-Out Cost) January 1, 1
Finished Goods January 1, 1
First In, First Out (FIFO) January 1, 1
Goods Received Note (GRN) January 1, 1
Inventory Shortage (Shrinkage) January 1, 1
Inventory Turnover (Stock Turnover) January 1, 1
Last In, First Out (LIFO) January 1, 1

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