Under the periodic inventory system, the cost of the merchandise that was returned is recorded as 1) a credit to the general ledger account Purchase Returns or the account Purchase Returns and Allowances, and 2) a debit to Accounts Payable. (The supplier/seller will record the return with a debit to Sales Returns and a credit to Accounts Receivable.)
The credit balance in the Purchase Returns account will partially offset the debit balance in the account Purchases.
Since the return of purchased merchandise is time consuming (and therefore costly), having the separate general ledger account Purchase Returns allows managers to quickly see the magnitude of the returns.
Gain unlimited access to our bookkeeping seminar videos, bookkeeping proficiency exams (and answers), bookkeeping cheat sheet, visual tutorials, and more—all designed to help you master valuable bookkeeping skills. Learn more about AccountingCoach PRO.