A returned item is entered from a credit note, in a returns book, and the two accounts you use depend on whose books you are writing in. When the business sends goods back to a supplier, it is a purchases return. When a customer sends goods back to the business, it is a sales return.
This lesson belongs to source evidence and original entry. It follows distinguishing invoices from credit notes.
How do the two kinds of return differ?
The clue is who holds the goods after the return. If the goods leave your business, you are the buyer returning them. If goods come back to you, you are the seller taking them back.
| Purchases return | Sales return | |
|---|---|---|
| Whose goods move? | Yours go to the supplier | Customer’s come to you |
| Credit note | You receive it | You issue it |
| Book of original entry | Purchases returns book | Sales returns book |
| Debit | Supplier (payable) | Sales returns |
| Credit | Purchases returns | Customer (receivable) |
How do you record a return?
- Find the credit note and read who issued it.
- Name the role: are you the buyer or the seller?
- Take the net amount after trade discount, as on the original invoice.
- Write it in the matching returns book.
- Post the total to the returns account, and each line to the personal account.
- Check that total debits equal total credits.
Worked example
Aina Stationery has two returns in March.
Return 1, to Bintang (Aina is the buyer). Aina returns 5 damaged reams from invoice 2041. Bintang issues credit note 305: 5 × 12 = 60, less 10% trade discount, so RM54.
- Debit Bintang Paper Supplies (payables) RM54, because Aina owes less.
- Credit purchases returns RM54.
Return 2, from Wira Tuition Centre (Aina is the seller). Aina sold Wira 12 boxes of pens at RM20 each, RM240 in total, on credit. Wira returns 3 boxes. Aina issues credit note S-02: 3 × 20 = RM60, with no discount.
- Debit sales returns RM60.
- Credit Wira Tuition Centre (receivables) RM60, because Wira owes less.
Balances. Bintang: 432 − 54 = RM378, still owed by Aina. Wira: 240 − 60 = RM180, still owed to Aina.
Check: 12 − 3 = 9 boxes kept, and 9 × 20 = RM180. Also 5 × 12 = 60 and 60 × 0.9 = 54. Both agree.
The mistake to watch for
A common slip is to use the same pair of accounts for both returns.
Mistaken entry for Return 2: Debit Wira Tuition Centre RM60, credit purchases returns RM60.
The student saw a return and a credit note, so used the purchases side. But this is Aina’s customer returning goods, so Wira’s balance has gone up instead of down, and purchases returns is overstated.
The correction is to check the direction of the goods first. Goods coming back to you are sales returns, so debit sales returns and credit the customer. A second slip is to use the gross price for the return and forget the trade discount, which would give RM60 instead of RM54 on Return 1.
Check yourself
Try these, then open each answer.
1. Aina returns goods to a supplier, and the credit note is RM36. Name the two accounts and the side for each.
Show answer
Debit the supplier’s account RM36 (payables fall). Credit purchases returns RM36.
2. A customer returns 4 boxes sold at RM20 each on credit. What is entered, and in which book?
Show answer
4 × 20 = RM80. It is a sales return: debit sales returns RM80, credit the customer’s account RM80, written from the credit note in the sales returns book.
3. A student records a customer’s return as debit customer, credit purchases returns. What is the effect on the customer’s balance?
Show answer
The customer’s account is debited, so the customer is shown as owing more instead of less. The correct entry is debit sales returns, credit the customer.
Where this leads next
Now combine documents, books and ledgers in building a trace from document to ledger. The double-entry and ledger trainer helps you check the direction of each posting.
If you keep reversing the wrong account, online one-to-one Accounting tuition gives you a teacher who looks at why the direction felt right at the time.