Purchase Returns Journal Entry

by Jamshaid
(Lahore)

Q: What is the journal entry when purchases are returned?

A: The short answer is that the purchase returns journal entry is just the exact opposite of the entry for when you purchased something in the first place.

Purchases Journal Entry

When you initially purchase goods you record the following (if you paid for the goods on credit):

DEBIT Inventory / Purchases
CREDIT Creditor / Accounts Payable

Or if you purchased goods by paying immediately, you would have recorded:

DEBIT Inventory / Purchases
CREDIT Bank / Cash

Most customer-supplier relationships are run on some kind of a credit system, so the first journal entry above is the most common.

Perpetual vs Periodic

Note that you would debit the inventory account (an asset account) if you were using a perpetual inventory system (a system that keeps perpetual or continuous track of your inventory in real-time) but if you were using a periodic inventory system you would debit the purchases account (a temporary expense account). For a full explanation see the lesson on perpetual and periodic inventory.

Purchases Returns Journal Entry

Now, the purchases return journal entry would be the opposite of the above. Since most customer-supplier relationships operate on credit, one would usually record:

DEBIT Creditor / Accounts Payable
CREDIT Inventory / Purchase Returns

Remember, accounts payable (or creditors) is a liability account, which increases on the credit side (right) and decreases on the debit side (left). Since we are returning goods we purchased, we owe our supplier less, so we debit accounts payable / creditors.

Please note that if the perpetual system is in use, the credit then goes to inventory, which reduces these assets.

But if the periodic system is in use, we credit an account called "purchases returns." Like the "purchases" account, "purchases returns" account is a temporary expense account. Purchases returns are set off against purchases to get a net purchases figure.

There you go!

I hope the purchases returns journal entry makes more sense now!

Best,
Michael Celender
Founder of Accounting Basics for Students


Related Questions & Tutorials:

• Basic Journal Entry Question: Capital + Purchase Returns
• What is Inventory?
• Debtors and Creditors Ledger Exercise (an advanced accounting exercise on control accounts which includes a little practice for purchases returns and sales returns)

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