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 accounts payable (trade creditors) ledger account of the supplier.
Purchase returns are sometimes called returns outwards and are 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:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | 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 accounts payable 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 credit to purchase returns reduces the value of purchases and at the end of the accounting period, will reduce the purchases debited to the income statement.
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 plus equity 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.
In this case a liability (accounts payable) is reduced as the amount owed to the supplier is cancelled, this reduction is balanced by the increase in owners equity. The credit to the income statement for the purchase return increases the net income which increases the retained earnings and therefore the owners equity in the business.
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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.