The Returns Day Book is a book of prime entry used to record goods that are returned either by customers or to suppliers. It is divided into two distinct sections: the Sales Returns Day Book (also known as the Returns Inwards Book) and the Purchases Returns Day Book (also known as the Returns Outwards Book). These books play an essential role in adjusting the original sales and purchase transactions, ensuring that financial records accurately reflect the actual business activity.
1. What Is the Returns Day Book?
The Returns Day Book serves as the initial point of recording for goods that have been returned. It helps in tracking discrepancies such as damaged, defective, or incorrect items and provides an organized method for adjusting sales and purchase records. This book ensures that returns are properly accounted for before posting to the Sales Ledger and Purchase Ledger.
Types of Returns Day Books:
- Sales Returns Day Book (Returns Inwards Book): Records goods returned by customers to the business.
- Purchases Returns Day Book (Returns Outwards Book): Records goods returned by the business to suppliers.
2. Sales Returns Day Book (Returns Inwards Book)
The Sales Returns Day Book is used to record goods returned by customers. This usually happens when customers receive faulty goods, incorrect orders, or goods that do not meet expectations. These returns reduce the total sales revenue and accounts receivable.
Example of a Sales Returns Day Book Format:
| Date | Credit Note No. | Customer Name | Details | Amount ($) |
|---|
Example:
XYZ Company experiences the following sales returns:
- Jan 4: Customer A returns goods worth $400 (Credit Note No. 201).
- Jan 6: Customer B returns goods worth $600 (Credit Note No. 202).
| Date | Credit Note No. | Customer Name | Details | Amount ($) |
|---|---|---|---|---|
| Jan 4 | 201 | Customer A | Goods returned due to damage | $400 |
| Jan 6 | 202 | Customer B | Incorrect goods delivered | $600 |
| Total Sales Returns: | $1,000 | |||
3. Purchases Returns Day Book (Returns Outwards Book)
The Purchases Returns Day Book is used to record goods that the business returns to its suppliers. This may occur due to receiving damaged goods, incorrect shipments, or goods not meeting specifications. Purchases returns reduce the total purchases and accounts payable.
Example of a Purchases Returns Day Book Format:
| Date | Debit Note No. | Supplier Name | Details | Amount ($) |
|---|
Example:
XYZ Company returns goods to suppliers as follows:
- Jan 8: Returned goods worth $300 to Supplier X (Debit Note No. 301).
- Jan 10: Returned goods worth $500 to Supplier Y (Debit Note No. 302).
| Date | Debit Note No. | Supplier Name | Details | Amount ($) |
|---|---|---|---|---|
| Jan 8 | 301 | Supplier X | Returned faulty raw materials | $300 |
| Jan 10 | 302 | Supplier Y | Incorrect items received | $500 |
| Total Purchases Returns: | $800 | |||
4. Posting from the Returns Day Book to the Ledgers
Once returns are recorded in the Returns Day Book, they are posted to the respective customer and supplier accounts in the Sales Ledger and Purchase Ledger. The total sales returns and purchase returns are also posted to the Sales Returns Account and Purchases Returns Account in the General Ledger.
Example of Sales Ledger Posting:
| Date | Details | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 4 | Goods returned by Customer A | $400 | $400 Cr. | |
| Jan 6 | Goods returned by Customer B | $600 | $600 Cr. |
Example of Purchase Ledger Posting:
| Date | Details | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 8 | Goods returned to Supplier X | $300 | $300 Dr. | |
| Jan 10 | Goods returned to Supplier Y | $500 | $500 Dr. |
5. Importance of the Returns Day Book
- Accurate Record-Keeping: Ensures that all goods returned are documented properly, helping maintain accurate financial records.
- Adjusts Revenue and Expenses: Sales returns reduce revenue, while purchase returns reduce expenses, providing a true reflection of financial performance.
- Supports Inventory Management: Helps track inventory movements, ensuring stock levels are accurately maintained.
- Improves Customer and Supplier Relations: Properly recording returns fosters transparency and builds trust with both customers and suppliers.
6. Differences Between Sales Returns and Purchases Returns
| Aspect | Sales Returns Day Book | Purchases Returns Day Book |
|---|---|---|
| Purpose | Records goods returned by customers. | Records goods returned to suppliers. |
| Effect on Accounts | Reduces accounts receivable and revenue. | Reduces accounts payable and expenses. |
| Document Issued | Credit Note issued to the customer. | Debit Note issued to the supplier. |
| Impact on Inventory | Increases inventory if goods are resalable. | Decreases inventory if goods are returned to the supplier. |
7. The Role of the Returns Day Book in Accounting
The Returns Day Book is a vital component of accounting, ensuring that all goods returned—whether by customers or to suppliers—are accurately recorded and reflected in the financial statements. By systematically documenting returns, businesses can adjust their revenue and expense figures appropriately, maintain accurate inventory levels, and foster transparent relationships with customers and suppliers. Proper management of the Returns Day Book supports effective financial reporting and contributes to overall business efficiency.