Definition of Purchase Return
A purchase return occurs when a buyer returns merchandise that it had purchased from a supplier. Since the return of purchased merchandise is time consuming and costly, under the periodic inventory system there will be an account Purchases Returns. This allows the company's management to see the magnitude of the returns that occurred.
The account Purchases Returns is a general ledger account that will have a credit balance (or no balance). Its credit balance will offset the debit balance in the Purchases account.
Example of a Purchase Return
Let's assume that a company using the periodic inventory system, purchased merchandise having a cost of $1,000 with terms of net 30 days. This was recorded with:
- A debit to Purchases for $1,000
- A credit to Accounts Payable for $1,000
A few days later, the company discovered that some of the merchandise it received was of a lower quality. The company notified the supplier and was instructed to return the merchandise. Assuming this merchandise had a cost of $200, the company recorded the purchases return as follows:
- A debit to Accounts Payable for $200
- A credit to Purchases Returns $200
The debit of $1,000 in the Purchases account and the credit of $200 in the Purchases Returns will mean that for this transaction the company had net purchases of $800.