Goods returned, also known as returns, refer to items that are sent back either by customers or to suppliers. In ledger accounting, properly recording goods returned is crucial for maintaining accurate financial records, as returns affect both revenue and expenses. Returns can be classified into two main types: returns inwards (sales returns) and returns outwards (purchase returns). This article explains how to account for goods returned with detailed journal entries and ledger examples.
1. Types of Goods Returned
A. Returns Inwards (Sales Returns)
Returns inwards occur when customers return goods to the business due to defects, incorrect deliveries, or other reasons. These returns reduce the company’s sales revenue.
B. Returns Outwards (Purchase Returns)
Returns outwards happen when the business returns goods to suppliers due to defects, overstocking, or discrepancies in the order. These returns reduce the cost of purchases.
2. Accounting Treatment of Goods Returned
A. Journal Entry for Returns Inwards (Sales Returns)
When goods are returned by customers, the sales revenue is reduced, and the accounts receivable balance is adjusted.
Journal Entry:
Debit: Sales Returns
Credit: Accounts Receivable (Customer)
B. Journal Entry for Returns Outwards (Purchase Returns)
When goods are returned to suppliers, the purchase cost is reduced, and the accounts payable balance is adjusted.
Journal Entry:
Debit: Accounts Payable (Supplier)
Credit: Purchase Returns
3. Example of Goods Returned in Ledger Accounting
Scenario:
XYZ Company experiences both types of returns during the month:
- A customer returns goods worth $1,200.
- XYZ Company returns goods worth $800 to a supplier.
4. Ledger Entries for Returns Inwards (Sales Returns)
A. Journal Entry for Returns Inwards:
Debit: Sales Returns $1,200
Credit: Accounts Receivable $1,200
Sales Returns Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 10 | Goods Returned by Customer | $1,200 | $1,200 Dr. |
Accounts Receivable Ledger (Customer)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 5 | Sale to Customer | $5,000 | $5,000 Dr. | |
| Jan 10 | Goods Returned by Customer | $1,200 | $3,800 Dr. |
5. Ledger Entries for Returns Outwards (Purchase Returns)
A. Journal Entry for Returns Outwards:
Debit: Accounts Payable $800
Credit: Purchase Returns $800
Purchase Returns Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 15 | Goods Returned to Supplier | $800 | $800 Cr. |
Accounts Payable Ledger (Supplier)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 3 | Goods Purchased from Supplier | $4,000 | $4,000 Cr. | |
| Jan 15 | Goods Returned to Supplier | $800 | $3,200 Cr. |
6. Impact of Goods Returned on Financial Statements
- Income Statement:
- Sales Returns: Reduce total sales revenue, thereby lowering gross profit.
- Purchase Returns: Reduce the cost of purchases, thereby increasing gross profit.
- Balance Sheet:
- Sales Returns: Reduce accounts receivable balances.
- Purchase Returns: Reduce accounts payable balances.
Example: Income Statement Impact
| Particulars | Amount |
|---|---|
| Sales Revenue | $10,000 |
| Less: Sales Returns | ($1,200) |
| Net Sales | $8,800 |
| Less: Cost of Goods Sold | ($5,000) |
| Add: Purchase Returns | $800 |
| Gross Profit | $4,600 |
7. Managing Goods Returned in Ledger Accounting
Accurately recording goods returned in ledger accounting is essential for maintaining correct financial statements and assessing business performance. Returns inwards reduce revenue, while returns outwards decrease the cost of purchases. By keeping clear and detailed ledger entries for both types of returns, businesses can ensure accurate accounting, better inventory management, and improved financial decision-making.