Accounting for Purchase Returns

Article written by EricBank

If you run a merchandising or manufacturing business, even a small one, you purchase many items that might include raw goods, inventory merchandise, equipment and supplies. You might occasionally receive miscounted, misidentified or defective items that you need to return. The procedure you follow for purchase returns is dictated by your inventory accounting methods and the type of item.

Inventory Methods

The periodic and the perpetual inventory methods are the two principal ways to track inventory:

·         Periodic Method: You take regular physical counts at least once a period (at the end), but more often if needed. Inventory is recorded when purchased. You wait until the close of the period to calculate cost of goods sold or ending inventory.

·         Perpetual Method: You book all sales, receipts and inventory movements immediately. This gives you real-time vision into your COGS and inventory levels. In return for this higher quality information, you need timely inventory tracking, perhaps with radio frequency or bar code technology.

Purchase Returns Under the Periodic Method

This inventory method requires the use of the purchases asset account and the purchase returns contra-asset account. When you buy inventory, debit the cost to the purchases account and credit it to accounts payable. Should you decide to return a purchased item, debit accounts payable and credit purchase returns for the original cost. As a contra account, the purchase returns credit balance decreases the net value of purchases. When the period ends, credit net purchases and debit inventory for the balance, and then prepare for the next period by zeroing out purchases and purchase returns.

Purchase Returns Under the Perpetual Inventory

Under this method of inventory accounting, you don't use a purchases account, because you add the cost of purchased items to the inventory account as the items are received. In the event you must return a purchased item, debit its cost to accounts payable and credit it to inventory. This method is less informative than is the periodic method, because the method doesn't employ a purchase returns account that would easily identify the returned items.

Other Returns

The purchases of office supplies and miscellaneous items are non-inventory expenses. Book them by debiting supplies expense and crediting accounts payable. If they sent you bad pencils or other defective supplies, you have to reverse the original entries. You use a different procedure for factory supplies, which must be included in the cost of goods sold. A return of factory supplies is also a reversal, but obviously of different accounts.

Equipment purchases, such as a truck, have a more complicated return accounting. When you buy the truck, you book the cost as a long-term asset, perhaps in a vehicles account. Then, at period's end, you make entries for depreciation and accumulated depreciation attributed to the truck. Now suppose that shortly after period close, you decide to return the truck, taking advantage of your state's "lemon law." In this case, you must:

·         Debit accounts payable

·         Debit accumulated depreciation

·         Credit vehicles

·         Credit depreciation expense

None of this bookkeeping is particularly difficult, but if you find it confusing or too time-consuming, let Small Business Financials handle your accounting for you.