Purchase Return Accounting

Purchase Return Accounting

In this article we would explain purchase return accounting. Purchase return is a contra revenue account, which would reduce the purchases. The purchase return is a common practice in the business , when supplied goods are either defective or does not meet specification.There are following two types of purchase returns. 

a)    Cash purchase return.

b)   Credit Purchase return.

1.   Cash Purchase Return Accounting:

Journal entry of cash purchase return may be recorded by crediting purchase return and debiting cash or receivable account as case may be. 

cash A/c would be debited in case cash is immediately received with the return of purchase ,otherwise receivable will be created by debiting receivables a/c. The journal entry for purchase return has been explained with an example below ;

Journal entry for purchase return of amounting 200,000 would be as under;

Date	Particulars	Dr	Cr
	Cash /Receivable A/c	200,000
	Purchase Return A/c		200,000

2.   Credit Purchases Return Accounting:

In case purchases are returned to creditor, the creditor is reduced (by debiting) and purchase return is credited.

Date	Particulars	Dr	Cr
	Creditor A/c	200,000
	Purchase Return A/c		200,000

If company maintain the purchase return day book account, then above entry is made in Total creditor account and also in individual account (memorandum account).

At the end of year all purchase return are credited to purchase account. Thus purchases account balance is reduced by purchase return account. Purchases return  is logically not treated as income, rather charged to purchase account.

Date	Particulars	Dr	Cr
	Purchase Return	200,000
	Purchases A/c		20,000

 
Separate Account for purchase Return

Separate account for purchase return is maintained for control purposes. Purchase return are not acceptable to the organization for two reasons i.e. it damages goodwill of the company and there are many costs associated with purchases like processing cost, delivery costs etc.

Closing entry of  Purchases Return :

purchase return account may be closed by transferring the balance to the purchases account. Thus purchases amount will be reduced by the purchases return.

Date	Particulars	Dr	Cr
	Purchases Return A/c	200,000
	Purchased A/c		200,000

Discount Received Accounting

Discount Received Accounting

In this article we would discuss discount received accounting. Discount received are discount allowed by the creditor on early payment. The discount received is treated as income for the business. Discount is credited being an income and Trade payable is debited as result of reduced liability.

Discount received will reduce the individual creditor (who gave discount) and total creditor/payable liability. It is important to note that discount received shall have no impact /affect on purchases. Some characteristics of discount received are listed below

a)    Discount received is an income.

b)   Discount received will reduce the creditor account.

c)    Discount received have no impact on Purchases.

d)   Discount received will be debited & Debtor account is credited.

Discount Received Accounting Example

Credit Purchases from Ahmed Khan = 200,000

Discount received= 10%

What would be journal entry for discount received?

Solution

In first step , we would record the purchases to creditor by debiting purchases account and crediting creditor account. In second step we would record the discount at the time of payment to creditors.

General Journal

Purchases Entry at time of purchases. In this entry purchases are debited being the increase in expense, while creditor account was credited being increase in liabilities.

Date	Particulars	Dr	Cr
	Purchases A/c	200,000
	Ahmed Khan A/c		200,000

Discount Entry at time of payment.i 

Date	Particulars	Dr	Cr
	Ahmed Khan A/c	40,000
	Discount received A/c		40,000

General Ledger

Now we post the above journal entries in T accounts of ledger. Purchases account will be debited in the light of journal entry, similarly discount received account will be credited. Ahmed account will be first credited for purchases and then debited for discount. This updated status is shown below

                                             Purchases Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Ahmed a/c	200,000		Balance	200,000
		200,000			200,000

                                        Discount Received Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	40,000		Ahamed Khan	40,000
		40,000			40,000

                                             Ahmed Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Discount	40,000		Purchases	200,000
	Balance	160,000
		100,000			100,000

Trial Balance

Now closing balances of T Accounts are transferred to trial balance. In trial balance the discount received appearance on credit side reflects its nature as income.

Account	Dr.	Cr.
Purchases	200,000
Discount Received		40,000
Debtor		160,000
	200,000	200,000

Purchase Accounting

Purchase Accounting

In this article we would explain purchase accounting or accounting for purchases. Purchases are expenses for the organization. Purchases are recorded on the bases of Purchase Bill (Purchase invoice is primary document for Purchase recording).

Purchases are recorded in General journal by debiting Purchase and crediting Cash or payable account (as case may be). There are two possible ways or methods of maintain Purchase recording.

a)    All Purchase (Cash & Credit) are recorded in General Ledger.

b)   Credit Purchase recorded in Purchase Day book (Large organization).

1.   General Journal Purchase Accounting Method

With help of an example, we have explained the recording in General Journal, and then posting into General Ledger. This method is chosen by small scale organization, which has limited Purchase transaction.

Purchase Accounting Example

Cash Purchase= 10,000

Credit Purchase from Saleem Khan = 20,000

Record the transaction General Journal & General Ledger?

Recording in General Journal

The purchases are debited being the expense for the organization and cash is credited in first entry due to decrease in asset. In second entry Saleem account is credited due to increase in liability/payable.

Date	Particulars	Dr	Cr
	Purchases A/c	10,000
	Cash		10,000

Date	Particulars	Dr	Cr
	Purchases A/c	20,000
	Saleem Khan A/c		20,000

Posting in General Ledger

In above two entries , there are three account involved i.e. purchases, cash and Saleem khan. Purchases were debited in journal, therefore it will transfer to debit side of purchase account,while cash and saleem khan were credited in journal entry, therefore credit side of these account will effect.

                                                  Purchase Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Cash	10,000		Profit & Loss	30,000
	Saleem	20,000
		30,000			30,000

                                                     Cash Account

Date	Particulars	Dr.	Date	Particulars	Cr.
				Purchase	10,000
	Balance	10,000
		10,000			10,000

                                                         Saleem Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	20,000		Purchase	20,000
		20,000			20,000

Trial Balance

The trial balance can be extracted from the closing balances of these accounts.

Accounts	Dr.	Cr.
Purchase	30,000
Saleem Khan		20,000
Cash		10,000
	30,000	30,000

2.   Purchase Day Book Purchase Accounting Method

Recording in Purchase day book and posting in General Ledger has been explained below.

a)    Purchase Day book is used to record credit purchases.

b)   Purchase Day book is used by large organization for high volume of Purchases.

c)    Purchase Journal total are entered in General Ledger.

d)   Purchase Journal form part of Double entry system.

e)    Subsidiary Ledger is maintained for individual customer as memorandum record.

Purchase Accounting Example

Credit Purchase made to following during week

Sara Khan = 20,000

Faheem Ahmed = 30,000

Jan Alam = 40,000

Recording in Purchase Day Book

Purchase Journal is special journal maintained by the large scale organization for credit sales.

                                                   Purchase Day Books

Sara Khan	20,000
Faheem Ahmed	30,000
Jan Alam	40,000
	90,000

Posting in General Ledger

The total figure of purchase journal is transferred to General ledger on periodical bases as shown below to total purchase account and total creditor accounts.

                                                   Total Purchase Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Profit & Loss	90,000	Total Creditor		90,000
		90,000			90,000

                                                  Total Creditor Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Total Purchase	90,000		Balance	90,000
		90,000			90,000

Memorandum Record

In addition to General ledger, the subsidiary ledger for individual account is maintained as memorandum record, and this record is updated regularly with each transaction. This ledger is memorandum record , but extremely important for creditor management i.e. tracking of individual balances and timely payments to creditor.

                                                  Sara Khan A/C

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	20,000		Purchases	20,000
		20,000			20,000

                                    

                                                   Faheem Ahmed Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	30,000		Purchases	30,000
		30,000			30,000

                                                      Jan Alam Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balalance	40,000		Purchases	40,000
		40,000			40,000