What is Purchase Return & Sales Return?

Definition of Purchase Return.

When a buyer of commodities, inventories, fixed assets, or other objects returns the goods to the seller, this is known as a purchase return. Purchase return also known as Return outward. Excessive purchase returns can have a negative impact on a company's profitability, thus they should be constantly handled. Purchase return can occur for a variety of reasons, including the following:

• The merchant sent the wrong item.
• The consumer made a mistake and bought the wrong item.
• The merchant sent the wrong item.
• In some way, the items have shown to be insufficient.
• The consumer purchased an excessive amount and want to return the remaining.

Charges for Restocking

In exchange for consenting to return items, the vendor can rightfully charge the buyer a restocking charges (unless the seller originally shipped the wrong goods to the buyer). The amount of a restocking charges is usually around 15% of the price paid by the buyer for the products being returned. If a company offers free returns within a specified number of days of the purchase date, this cost is usually avoided.

Return Merchandise Authorizations (RMA)

A purchase return is normally permitted under the terms of a return merchandise authorization (RMA) granted by the vendor to the consumer. When the buyer packages the products for return to the seller, the RMA number is written on the top of the package, which the seller's receiving department compares to its list of authorized and outstanding RMA numbers before accepting the shipment. The delivery will be denied if there is no RMA number.

How to Cover that cost to Buyer for Goods Returned

The vendor has a number of options for repaying the buyer for returned items, including:

• The buyer is paid in full in cash.
• Can provide credit on future purchases
• A credit memo that the buyer can use to deduct from the seller's next payment.

Accounting for a Purchase Return

A purchase return can be recorded as a credit to the buyer's inventory account (assuming there are few such transactions) or as a debit to a purchase returns account (if management wants to segregate this information for further analysis). The account payable account is debited to offset the credit.

Definition of Sales Return.

A customer returns products to the vendor in a sales return. Sales Return also known as Return Inward. The reason for the return is frequently because an excess quantity was ordered or transported, or because the goods were defective. A return could also be triggered if goods were delivered late, or the incorrect things were sent, or the product specifications were incorrect.

Sales Returns have  Profit impact.

It's possible that a sales return won't be approved until after the initial sale transaction has been completed. If this is the case, there will be an excessive amount of revenue recognized in the initial reporting period, offset by a fall in sales in a subsequent reporting month. Profits in the first period are overstated, whereas profits in the second period are understated.

Controlling Sales Returns

A seller can tightly control the volume of sales returns by demanding a sales return authorization number before accepting a return to its receiving department. Otherwise, some buyers will return goods without repercussions, some of which may be damaged and hence unsellable.

Accounting for a Sales Return

This refund is recorded as a debit to a Sales Returns account and a credit to an Accounts Receivable account; the total amount of sales returns in this account is subtracted from the reported amount of gross sales in a period to produce a net sales number. The credit to Accounts Receivable reduces the amount of outstanding accounts receivable.

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