Question

purchase return account classify the following account and give brief explanation​

Answer 1

Answer:

Purchases returns, or returns outwards, are a normal part of business. Goods may be returned to supplier if they carry defects or if they are not according to the specifications of the buyer.

Accounting for Purchase Returns

There is need to account for purchase returns as though no purchase had occurred in the first place.

Hence, the value of goods returned to the supplier must be deducted from purchases.

If purchase was initially made on credit, the payable recognized must be reversed by the amount of purchases returned. If the purchases in respect of the goods returned were made for cash, then a receivable must be recognized to acknowledge the asset resulting from the expected reimbursement to be received from the supplier in respect of the returned goods.

Purchase Return - Credit Purchases

In case of credit purchases,the following double entry must be made upon purchases returns:

Debit Payable (decrease in liability)

Credit Purchases Return (decrease in expense)

Example

Bike LTD purchases a mountain bike from BMX LTD for $100 on credit. Bike LTD later returns the bike to BMX LTD due to a serious defect in the design of the bike.

The initial purchase will be recorded as follows:

Debit Purchases $100

Credit BMX LTD (Payable) $100

Upon the return of bike, the following double entry will be passed:

Debit BMX LTD (Payable) $100

Credit Purchases Return $100

No further entry will be required as the payable due to BMX LTD has been reversed.

Purchase Returns - Cash Purchase

In case of cash purchases, the following double entry must be made upon sales returns:

Debit Receivable (increase in asset)

Credit Purchases Return (decrease in expense)

Example:

Bike LTD purchases a mountain bike from BMX LTD for $100 on cash. Bike LTD later returns the bike to BMX LTD due to a serious defect in the design of the bike.

The initial purchase will be recorded as follows:

Debit Purchases $100

Credit Cash $100

Upon the return of bike, the following double entry will be passed:

Debit BMX LTD (Receivable) $100

Credit Purchases Return $100

When BMX LTD will pay $100 owed to Bike LTD in respect of the purchases return, the following double entry will be recorded in Bike LTD's books:

Debit Cash $100

Credit BMX LTD (Receivable) $100

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