Purchase Return Journal Entry (Meaning)

What is the Purchase Return Journal Entry?

Purchase Return Journal Entry is passed by the company to record the transaction of return of the merchandise purchased from the supplier. Here the cash account debits in case of the cash purchases or the accounts payable account in case of the credit purchases and the purchase return account will be credited in the books of accounts of the company.

How to Make Journal Entries of Purchase Return?

In the cases, when the company is purchasing goods from the supplier, then in books of accounts, there will be debit in the purchases account as it will increase the company’s inventory (assets). There will be credit in the Cash account if purchased in cash or credit in accounts payable account if purchases have been made on credit from the third party (supplier). The Journal Entry to record Purchase is as below:

Purchases in Cash

Purchases on Credit

Now, when the company returns the goods against the purchases made previously, then the cash account or accounts payable account for the cash purchases or credit purchases respectively will be debited with a corresponding credit to purchase return account as there is the return of the goods out of the company to the supplier. The book entry to record the return against the purchase of goods by the company is as follows:

Purchase Return of Goods Purchased in Cash

Purchase Return of Goods Purchased on Credit

Example of Purchase Return Journal Entry

Let’s take an example of a purchase return journal entry.

You can download this Purchase Return Journal Entry Excel Template here – Purchase Return Journal Entry Excel Template

There is company A ltd. purchased goods from suppliers worth $ 150,000 on 1^st September 2019 by paying the cash with the condition that goods can be returned only within 15 days from the date of purchase. On 13^th September 2019, A ltd returned the goods to the supplier. Pass the necessary journal entry in the company’s books of accounts to record the purchase of goods and return of such goods to the supplier?

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Solution:

On 1^st September 2019, when goods were purchased in cash from the supplier, then the purchase account will get debited, and the cash account will be credited. The Entry is as follows:

On the 13^th September 2019, when the goods are returned to the supplier, then the cash account will be debited with a corresponding credit to purchase return account as there is the return of the goods out of the company to the supplier. The entry to record such purchase return is as below:

Advantages of Purchase Return Journal Entry

The different advantages related to the purchase return journal entry are as follows:

It helps the company in recording every transaction involving the return of the goods, which were purchased by the company either in cash or credit from its supplier, thereby keeping all the track of the same.
When the company is recording the return of the purchases, it can reduce the balance of such purchase return from the balance of the inventory to know the exact balance or the status of the inventory present in the company at a particular point in time.

Disadvantages of Purchase Return Journal Entry

The disadvantages related to the Purchase Return Journal Entry are as follows:

The recording of purchase Return journal entry involves the intervention of a human, so chances prevail that the person who is engaged in recording such transaction may commit a mistake in such recording, which then will ultimately present the wrong picture of the company.
In the case of the companies, where there is a large number of returns, it becomes time-consuming to record every such entry.

Important Points

The different essential points related to the Purchase Return Journal Entry are as follows:

When the returned to the supplier of the goods, then the cash account or accounts payable account for the cash purchases or credit purchases respectively will be debited with a corresponding credit to purchase return account as there is the return of the goods out of the company to the supplier.
To know the exact balance of the inventory present in the company at a particular point in time, the company can reduce the balance of such purchase return from the balance of the inventory.

Conclusion

Thus the purchase return journal entries are recorded in the company’s books of accounts when the goods which are purchased either on cash or credit by the company are returned to the supplier of such goods.

When the goods are purchased on cash or credit, then the purchases account will get debited in company’s books of accounts which will be shown in the income statement of the company and the cash account or accounts the payable account will be credited because it will either reduce the cash in case of cash purchases or it will create the liability of the company in case of credit purchases. Now, when the company returns the goods against the purchases made previously, then the cash account or accounts payable account for the cash purchases or credit purchases respectively will be debited with a corresponding credit to purchase return account as there is the return of the goods out of the company to the supplier.

Purchase Return Journal Entry