A business makes a purchase return by sending goods back to a supplier with a debit note, and the supplier on acceptance, issues a credit note.

The goods have a purchase value of £2,000 and had been purchased from the supplier on account, the balance due remains outstanding in the creditors (accounts payable) ledger account of the supplier.

A purchase return, sometimes called a returns outwards, is recorded in the accounting records as follows:

Journal Entry for a Purchase Return

The accounting records will show the following bookkeeping entries for the purchase return of inventory:

Journal Entry for a Purchase Return
Account Debit Credit
Creditors Control 2,000
Purchase Returns 2,000
Total 2,000 2,000

Purchase Return Bookkeeping Entries Explained

Debit
The amount owed to the supplier would have been sitting as a credit on the creditors control account. The debit above cancels the amount due and returns the suppliers balance to zero.



Credit

The goods are returned and the asset of inventory decreases. The debit to purchase returns reduces the value of purchases and at the end of the accounting period, will reduce the purchases debited to the profit and loss account.


The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Purchase Return Accounting Equation
Assets = Liabilities + Owners Equity
None = Creditors + Purchases
0 = -1,000 + 1,000

In this case a liability (creditors) is reduced as the money owed to the supplier is cancelled, this reduction is balanced by the increase in owners equity. The credit to the profit and loss for the purchase return increases the profit which increases the reserves and therefore the owners equity in the business.

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