Returns Outward
“Returns Outward” (also known as “purchase returns”) refers to the goods a business returns to its suppliers. Just as customers can return goods to a business, the business itself can return goods to its suppliers for various reasons, such as receiving damaged goods, incorrect items, or items that don’t meet quality standards.
In accounting terms:
- “Returns Outward” is recorded in a separate returns outward journal.
- It reduces the amount owed to the supplier if the original purchase was made on credit.
- On the income statement, it will decrease the cost of goods sold if the return is accepted and processed within the same accounting period.
Example of Returns Outward
KitchenKraft, a company that sells kitchen appliances, placed an order with its supplier, ElecGoods, for 50 blenders at $40 each, totaling $2,000. Upon receiving the shipment, KitchenKraft’s quality control team noticed that 5 blenders were malfunctioning.
Accounting Entries:
- Initial Purchase:
- Debit Inventory: $2,000 (This recognizes the value of the blenders added to the stock.)
- Credit Accounts Payable: $2,000 (This amount is now owed to ElecGoods.)
- Upon Discovering the Faulty Blenders: KitchenKraft decided to return the malfunctioning blenders to ElecGoods.
- Debit Accounts Payable: $200 (This is 5 blenders x $40 each. This entry reduces the amount owed to ElecGoods for the returned items.)
- Credit Inventory: $200 (This reduces the stock value for the returned blenders.)
Financial Statement Impact:
- Income Statement: If KitchenKraft had sold any of these blenders within the accounting period, the “cost of goods sold” (COGS) would need to be adjusted. Given the return, the COGS would decrease, thus increasing the gross profit.
- Balance Sheet: The “Accounts Payable” section will reflect an amount of $1,800 (initially $2,000 – $200 for the returned blenders) owed to ElecGoods.
Operational Considerations:
- KitchenKraft might schedule a meeting with ElecGoods to discuss the quality issues and ensure such problems don’t recur.
- If similar issues persist in future shipments, KitchenKraft may consider finding a new supplier to ensure they provide only quality products to their customers.
- On ElecGoods’ end, they might conduct an internal review to identify the root cause of the malfunction in their blenders. This is essential to maintain their business relationship with KitchenKraft and other clients.
This example demonstrates the accounting process for returns outward and highlights how such transactions can inform and influence operational decisions for a business.
