Every business owner must know the difference between sales returns and purchase returns. There is a difference in these returns, which should be taken care of by your customer service team to avoid creating a bad impression for your business.
Sales return and purchase return are two very different terms that can affect your bottom line. The success of your business depends on knowing the difference between these returns and how they will affect your business.
Sales return occurs when a customer returns unopened merchandise that has been purchased. Purchase returns occur when a customer returns merchandise that was not purchased from the company but may have been owned by them before.
Now, let’s explore sales return and purchase return journal entries in detail.
What is a sales return journal entry?
A sales return journal entry is an accounting transaction that records when a sales item is returned to the company. Businesses need to track when returned goods are counted as company revenue and expense.
Sales Return journal entry is a debit to the Cost of Goods Sold account to record sales returns. It is used to record the sales returns that occurred during a specific period. Sales return accounting allows you to determine how much revenue was generated from a product (or service) and the amount of money spent to create it.
A sales return journal entry is the way you record all sales returns. It’s a permanent part of your transaction ledger and can be used to track everything from inventory to sales, and claims at any point in time.
What is a purchase return journal entry?
A purchase return journal entry is a journal entry that records the change in the asset and its corresponding liability resulting from a purchase of an asset or when a sale of an asset is made. Usually, at the end of the year, all accounts will be closed and debits will be placed against debits.
This journal entry records the receipt of goods and services. In this entry, you can record the price paid for an item or the cost of materials such as labor or materials that have been used in the manufacture of a product. This type of journal entry can be used to track inventory and value-added tax (VAT).
A purchase return journal entry posts a liability for an outstanding amount to the account of a vendor for goods or services which have not yet been delivered. When accounts receivable are paid timely, this obligation to pay can be recorded as a credit to the same account. The journal entry process is used when payments from bills are received and recorded in the accounting system.
Difference Between Sales Returns And Purchase Returns
Here follows the key difference between return inwards and return outwards.
The return inwards is the cash inflow and the return outwards is the cash outflow. Return inwards refers to the money you got from selling goods or services, while return outwards refers to the money that was used to buy goods and services.
With no further delay, let’s explore the difference between them.
Definition
- Return inwards or sales return is the bill or receipt by the salesperson, that was literally sold to the buyer. But the product is returned to the merchandiser because of the flawed, excess, or incorrect product sale.
- Return outwards or purchase return is the product return by a buyer to the merchandiser from whom they were literally bought.
Hierarchy
- Sales return happens after an outward return. It is because the item can only be accepted by the merchandiser after they returned it to the buyer.
- Purchase return happens sooner, at the point that the buyer returns the purchased products.
Transaction trigger
- When traded products are returned to the merchandiser, this is known as sales return or return inward.
- When a buyer returns the accepted products, this is called a purchase return or return outwards.
Accompanying documentation
- To achieve a sales return transaction, the merchant gives a credit note to the respective buyer, saying that the payment of the returned products is credited to the respective buyer’s account in the merchant’s books.
- To achieve a purchase return transaction, the buyer gives a debit note to the merchant, saying that the payment of the returned products is deducted from the merchant’s account in the respective buyer’s books.
Impact on books of accounts
- Sales return lowers the merchant’s sales. Also, it shows liability on the books payable form, in the respective buyer’s favor.
- The buyer’s purchases are lowered, when the product is outward returned to the seller. It is an asset purchase in the books, which is in the form of a receivable for the sellers.
Entry in books of accounts
- The merchant’s accounts book will mirror the return inwards.
- The buyer’s accounts books will document the return outwards.
Disclosure in the financial statements
- Sales return is displayed in the merchant’s trading account as a deduction from sales which will reach the Net sales.
- Purchase returns are documented as a deduction from acquisitions in the buyer’s trading account.
Consequences
- When stocks are returned inwards, the sales profits are repaid or the stocks are sold again.
- Returning stocks outward results in the buyer acquiring a repayment of the purchased cost or receiving new stock in exchange.
FAQ’s
Do sales return revenue or expense?
The sales returns hold a direct consequence on the net income, thereby reducing the revenue. This can’t be said as an expenditure, but they donate to the income loss.
How to Control Sales Returns?
Here is a portion of the tips to lessen goods return. These tips will assist you with controlling return goods and return products journal entries.
- Begin with quality control to diminish returns
- Address item precisely
- Notice the specific and right sides of the goods
- Attempt to get client audits and input
- Try to pack your thing in the correct manner
- Notice the right conveyance date
- Plan to follow the liberal return strategy
Does a purchase return an expense?
Purchase return can’t be seen as an operational expense. It helps you in cost decrease in business. It very well may be seen as a contra business ledger.
Purchase returns are credit or debit, in trial balance?
Purchase return will diminish the business consumption. In this way, it will be placed on the trial balance’s credit side.
What is sales return in terms of accounting?
A sales return is a stock that is returned to a separate vendor. The purpose for sending back the stock to the vendor may be because of any shortcoming in the merchandise, transporting some unacceptable thing, sent and getting late, or the got item particular may be off-base.
The dealer will record this separate return as the credit to the records receivable record and charge to the sales return account; The amount of the whole measure of sales returns in this particular record is viewed as the derivation from the detailed money of net sales in a term, which acquires a net sales figure. The credit to the record of records receivable deducts the charge of records receivable due.