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
- 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.
- 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.
- 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.
Related Terms with Definitions
- 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
- Investopedia: Purchases Returns Definition
- The Balance: Recording Purchases Returns
- Accounting Coach: Explanation of Purchases Returns
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Financial Accounting” by Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
Accounting Basics: “Purchases Returns” Fundamentals Quiz
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