Returns Outwards

Definition

Returns Outwards, also known as purchase returns, refer to goods that an organization sends back to its suppliers. This usually occurs because the goods were found to be defective, damaged, different from what was ordered, or otherwise unsatisfactory. It’s a critical component of inventory management and helps ensure that businesses maintain the quality of products they stock. These transactions are recorded in the returns outwards account, which ultimately gets deducted from the total purchases in a period.

Examples

A clothing retailer orders 100 units of shirts from a supplier, but upon delivery, they find that 20 of the shirts have defects in the stitching. The retailer returns these defective shirts to the supplier. This transaction is recorded as a returns outwards.
A restaurant orders 50 pounds of fresh produce, but when it arrives, a portion of the products is found to be spoiled. The restaurant returns the spoiled produce to the supplier for a refund or replacement, and records this as returns outwards.
An electronics store receives a shipment of laptops, but some of the units have scratches on the screens. The store sends back these scratched laptops to the supplier for replacements and logs the transaction under returns outwards.

Frequently Asked Questions

What is the main purpose of returns outwards?

Returns outwards help an organization manage inventory effectively and ensure that they only stock goods that meet their quality standards. It also aids in maintaining a good relationship with suppliers by promptly addressing issues.

How are returns outwards recorded in accounting?

Returns outwards are recorded as a separate entry in the purchases returns or returns outwards account. This amount is then subtracted from the total purchases, reducing the cost of goods purchased in the accounting period.

Can returns outwards affect financial statements?

Yes, returns outwards can impact financial statements. Specifically, they reduce the total purchases, thereby affecting the Cost of Goods Sold (COGS) and ultimately the net income.

Is returns outwards the same as returns inwards?

No, returns outwards (purchase returns) refer to goods sent back to suppliers by the buying company, while returns inwards (sales returns) refer to goods returned by customers to the selling company.

What might prompt an organization to make a return outward?

Returns outward may be prompted by factors such as defective goods, incorrect orders, poor quality, surplus stock, or any condition that makes the goods unsatisfactory for the organization’s needs.

Do returns outwards involve any specific documents?

Yes, returns outwards transactions typically involve a debit note to inform the supplier of the return and a corresponding update to the inventory and accounting records.

How do returns outwards impact supplier relationships?

Efficient management of returns outwards can enhance supplier relationships by ensuring that any issues with deliveries are promptly addressed, fostering transparency and mutual benefits.

Are there industry-specific variations in how returns outwards are handled?

Yes, the handling of returns outwards can vary by industry based on factors like the nature of goods, return policies, and the terms agreed upon with suppliers.

Can returns outwards be deducted from purchase directly?

In some accounting systems, returns outwards are directly deducted from purchases, which simplifies the tracking of net purchases.

What accounting entries are made when goods are returned outward?

When goods are returned outward, the entries typically involve debiting the accounts payable (or creditor) and crediting the returns outwards account, which adjusts inventory and accounts appropriately.

Returns Inwards

Returns Inwards refer to goods that customers return to the seller. This usually occurs because the goods were defective, different from what was ordered, or otherwise undesirable.

Debit Note

A Debit Note is a document issued by a buyer to a seller as an official request for a credit note, usually due to a return outward. It decreases the buyer’s obligation to pay the seller.

Credit Note

A Credit Note is a document issued by a seller to a buyer, confirming that the buyer has a credit for the returned goods. It reduces the amount owed by the buyer to the seller.

Online References

Suggested Books

“Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- A comprehensive guide that covers the fundamentals of financial accounting, including detailed sections on purchase returns and handling inventory.
“Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson
- This book offers an in-depth look at both basic and advanced accounting concepts, with practical examples of returns outwards.
“Accounting: Handbook for Non-Accountants” by Peter J. Eisen
- Useful for those without an accounting background, this book explains returns outwards and other key accounting principles in simple terms.

Accounting Basics: “Returns Outwards” Fundamentals Quiz

### What does the term "returns outwards" refer to? - [ ] Goods received by an organization from other organizations. - [x] Goods returned by an organization to its suppliers. - [ ] Goods returned by customers to the organization. - [ ] Payments made by an organization to its suppliers. > **Explanation:** Returns outwards refer to goods returned by an organization to its suppliers, usually because they are unsatisfactory or defective. ### Why are returns outwards important for businesses? - [ ] They increase the overall cost of purchases. - [ ] They grant a business new goods options. - [x] They help maintain the quality of inventory. - [ ] They lead to increased supplier debt. > **Explanation:** Returns outwards are important as they help maintain the quality of inventory by ensuring that only satisfactory goods are kept by the business. ### Which document is typically issued during a return outward? - [x] Debit Note - [ ] Credit Memo - [ ] Invoice - [ ] Purchase Order > **Explanation:** A debit note is typically issued during a return outward to inform the supplier of the return and request an adjustment to the amount owed. ### How do returns outwards affect the cost of goods sold (COGS)? - [ ] They increase COGS. - [x] They reduce COGS. - [ ] They have no effect on COGS. - [ ] They only affect the balance sheet. > **Explanation:** Returns outwards reduce the cost of goods sold (COGS) since they decrease the total purchases or inventory acquired by the business. ### Which of the following shows where returns outwards are recorded? - [ ] Production Payroll Account - [ ] Accounts Receivable - [x] Returns Outwards Account - [ ] Sales Account > **Explanation:** Returns outwards are recorded in the Returns Outwards Account, which specifically tracks the goods sent back to suppliers. ### What might prompt a returns outwards process? - [ ] An increase in customer demand. - [ ] Purchase of new goods. - [x] Receipt of defective or unsatisfactory goods. - [ ] Supplier request. > **Explanation:** Returns outwards are usually prompted by the receipt of defective or unsatisfactory goods, which do not meet the buyer’s standards. ### Who benefits directly from handling returns outwards efficiently? - [ ] Only suppliers - [x] Both parties (suppliers and buyers) - [ ] Only customers - [ ] Government authorities > **Explanation:** Both suppliers and buyers benefit from handling returns outwards efficiently as it ensures quality control and sustains good supplier relationships. ### Can returns outwards be part of every business’s purchase process? - [x] Yes, as it aids in quality control. - [ ] No, as it is related only to sales. - [ ] No, it is usually an accounting error. - [ ] Only for businesses with high sales volume. > **Explanation:** Returns outwards can be a part of every business’s purchase process as it aids in maintaining the quality of the goods purchased. ### What account is credited when goods are returned to the supplier? - [ ] Accounts Receivable - [ ] Sales Account - [ ] Cost of Goods Sold - [x] Returns Outwards > **Explanation:** When goods are returned to the supplier, the Returns Outwards account is credited to reflect the decrease in purchases. ### Returns outwards can be a part of which financial statement? - [ ] Income Statement - [x] Statement of Financial Position - [ ] Statement of Cash Flows - [ ] Note to Accounts > **Explanation:** Returns outwards can be reflected in the Statement of Financial Position under inventory adjustments and can impact total purchases on the Income Statement.

Thank you for immersing yourself in the comprehensive understanding of the returns outwards concept. Good luck in applying this knowledge practically and excelling in your financial endeavors!