Purchase returns, also known as return to supplier (RTS), refer to situations where a buyer returns goods to a seller due to reasons such as damaged goods, incorrect items shipped, poor quality, or excess supply. It’s a common practice in business, and is part of managing the relationship between a buyer and a supplier.
In accounting, a purchase return is recorded as a decrease in inventory and accounts payable (assuming the purchase was made on credit). The business would debit (decrease) accounts payable, and credit (decrease) inventory.
Usually, the buyer will issue a debit memo for the returned goods to the supplier which reduces the amount that the buyer owes to the supplier. The supplier may also issue a credit memo to the buyer, indicating that the buyer’s account has been credited for the value of the returned goods. This reduces the amount that the buyer owes the supplier.
Purchase returns are an important part of managing a company’s cash flow and ensuring that it only pays for goods that meet its requirements. It’s also important from a supplier perspective, as it can indicate issues with product quality, shipping accuracy, or customer satisfaction.
Example of Purchase Returns
Let’s consider a clothing retailer, “Fashion Central”, which purchases a shipment of 200 dresses from a supplier for $50 each, totaling $10,000. After receiving the shipment, they discover that 20 of the dresses have a manufacturing defect.
Here’s how Fashion Central might handle this as a purchase return:
- Initiate the return: Fashion Central contacts the supplier and arranges to return the defective dresses.
- Issue a debit memo: Fashion Central creates a debit memo for the returned dresses, which amounts to $50 (cost per dress) x 20 (number of defective dresses) = $1,000.
- Record the return in the accounts: In the accounting books, Fashion Central would decrease (debit) its accounts payable to the supplier by $1,000, and also decrease (credit) its inventory by the same amount. This reflects the fact that they now owe $1,000 less to the supplier and also have 20 fewer dresses in their inventory.
- Supplier issues a credit memo: Upon receipt of the returned dresses, the supplier may issue a credit memo to Fashion Central, confirming that their account has been credited by $1,000.
In this way, the purchase return process ensures that Fashion Central does not have to pay for defective goods. The process also highlights a potential quality control issue to the supplier, who can then take steps to prevent such defects in the future.