Purchases Returns Book

What is Purchases Returns Book?

Imagine you own a phone shop in Computer Village, Lagos. You ordered 50 Tecno phones from a distributor on credit. When the phones arrive, you discover that 5 phones have cracked screens. You return those 5 damaged phones to the supplier. Where do you record this return? In the Purchases Returns Book.

The Purchases Returns Book is a special book where businesses record all goods bought on credit that are later sent back to suppliers. It is one of the subsidiary books (also called books of original entry) used in accounting.

The word “Outward” is used because goods are going out of your business – returning to the supplier. This is different from Sales Returns (Returns Inward) where customers return goods to you.

Why Goods Are Returned to Suppliers

Businesses return purchased goods for several reasons:

1. Damaged goods: A restaurant in Abuja orders 10 crates of eggs but finds 20 eggs broken on arrival. Those damaged items will be returned.

2. Wrong items delivered: You ordered 50 packets of Dangote Cement but the supplier sent Elephant Cement instead. You return the wrong items.

3. Poor quality or substandard goods: A pharmacy receives drugs that are close to expiry date when they ordered fresh stock. NAFDAC regulations may require returning such items.

4. Excess supply: You ordered 100 notebooks but the supplier sent 150. You return the extra 50 that you did not order.

5. Goods not matching specification: A tailor ordered blue fabric but received green. The wrong color will be returned.

6. Late delivery: Seasonal goods (like Christmas decorations ordered in November but delivered in January) may be returned as they are no longer useful.

Format of Purchases Returns Book

The Purchases Returns Book has a simple format:

Column Explanations:

• Date: When goods were returned to the supplier
• Particulars: Name of the supplier receiving the returned goods
• Debit Note No.: Reference number of the debit note sent to supplier
• Folio: Page reference in the Purchases Ledger where the supplier’s account is found (e.g., PL 15 means Purchases Ledger page 15)
• Amount: Value of goods returned (usually at cost price, excluding any trade discount already deducted)

Source Document: The Debit Note

Before recording in the Purchases Returns Book, a business must issue a Debit Note to the supplier. This is a document informing the supplier that goods are being returned and the buyer’s account should be debited (reducing what the buyer owes).

Think of it this way: When you bought goods on credit, the supplier’s account was credited (you owe them money). When you return goods, you issue a Debit Note to reverse part of that credit – you now owe them less money.

Sample Debit Note:

This Debit Note becomes the source document for recording ₦35,000 in the Purchases Returns Book.

How to Record in Purchases Returns Book

Follow these steps when recording purchases returns:

Step 1: Check that goods were originally bought on credit (not cash). Cash returns are recorded differently – in the Cash Book with double entry.

Step 2: Verify the Debit Note has been prepared and sent to supplier.

Step 3: Enter the return in the Purchases Returns Book with the date, supplier’s name, debit note number, folio reference, and amount.

Step 4: At month-end, total the Amount column.

Step 5: Post the total to the ledger accounts.

Posting to Ledger Accounts

At the end of the month, two postings are made from the Purchases Returns Book:

1. Individual Postings (Daily or Weekly):

Each supplier’s account in the Purchases Ledger is debited with the value of goods returned to them. This reduces what you owe them.

Dangote Industries Ltd Account (Purchases Ledger)
Dr                                            Cr
_______________________________________________
Jan 5 Returns Outward ₦45,000 | Jan 1 Purchases ₦200,000

2. Total Posting (Month-End):

The monthly total is posted to the credit side of Returns Outward Account (or Purchases Returns Account) in the General Ledger.

Returns Outward Account (General Ledger)
Dr                                            Cr
_______________________________________________
                           | Jan 31 Sundries (PRB) ₦86,250

The word “Sundries” means various suppliers – it represents the total of all individual returns.

Double Entry for Purchases Returns

The complete double entry is:

Debit: Supplier’s Personal Account (in Purchases Ledger)
Credit: Returns Outward Account (in General Ledger)

This makes sense because:

• We are reducing what we owe the supplier (debit reduces a creditor)
• We are increasing our returns outward (credit increases returns, which reduces net purchases)

Effect on Final Accounts

Returns Outward appears in the Trading Account as a deduction from Purchases:

Returns Outward is also called Purchases Returns and Allowances in some textbooks. Allowances are deductions granted by suppliers for defective goods you keep (instead of returning them).

Purchases Returns vs Sales Returns

Many students confuse these two. Here is the difference:

Common Exam Mistakes to Avoid

Practice Questions

Multiple Choice Questions

1. The source document for recording purchases returns is:

a) Invoice
b) Credit Note
c) Debit Note (✓)
d) Receipt

2. Purchases Returns Book is also known as:

a) Returns Inward Journal
b) Returns Outward Journal (✓)
c) Sales Returns Book
d) Petty Cash Book

3. When goods are returned to a supplier, the double entry is:

a) Debit Returns Outward Account, Credit Supplier’s Account
b) Debit Supplier’s Account, Credit Returns Outward Account (✓)
c) Debit Purchases Account, Credit Supplier’s Account
d) Debit Supplier’s Account, Credit Purchases Account

4. In the Trading Account, Returns Outward is:

a) Added to Purchases
b) Deducted from Purchases (✓)
c) Added to Sales
d) Deducted from Sales

5. The total of Purchases Returns Book is posted to the:

a) Debit side of Returns Outward Account
b) Credit side of Returns Outward Account (✓)
c) Debit side of Purchases Account
d) Credit side of each supplier’s account

Essay/Theory Questions

Question 1: (a) What is Purchases Returns Book? (2 marks)
(b) State FOUR reasons why a business may return goods to suppliers. (4 marks)
(c) Name the source document used when recording purchases returns. (1 mark)
(d) Explain why this book is also called Returns Outward Book. (3 marks)

Examiner’s Tip: For part (d), focus on the direction of goods movement – “outward” means leaving your business and going back to the supplier. Contrast with “inward” for customers returning goods to you.

Question 2: The following returns were made by Emeka Stores during February 2024:

Feb 3: Returned goods worth ₦25,000 to Okon Suppliers (Debit Note DN/12)
Feb 10: Returned goods worth ₦18,500 to Ngozi Enterprises (Debit Note DN/13)
Feb 22: Returned goods worth ₦32,000 to Abubakar Ltd (Debit Note DN/14)

Required:
(a) Prepare the Purchases Returns Book for February 2024. (6 marks)
(b) Show the ledger postings for the above transactions. (6 marks)
(c) Explain how the total will appear in the Trading Account. (3 marks)

Examiner’s Tip: For part (a), use proper format with Date, Particulars, Debit Note No., Folio, and Amount columns. Total the amount column. For part (b), show entries in three supplier accounts (debit side) and Returns Outward Account (credit side). For part (c), mention it will be deducted from Purchases.

Question 3: Distinguish between Purchases Returns and Sales Returns under the following headings:
(a) Meaning (3 marks)
(b) Source document used (2 marks)
(c) Effect on Trading Account (3 marks)
(d) Book of original entry (2 marks)

Examiner’s Tip: Use comparative format – state both concepts for each heading to show clear distinction. For example: “Purchases Returns means…while Sales Returns means…”

Question 4: On 10th April 2024, Chidi bought goods worth ₦180,000 on credit from Bala Merchants. On 15th April, he discovered that goods worth ₦30,000 were damaged and returned them.

Required:
(a) Prepare the Debit Note Chidi will issue to Bala Merchants. (5 marks)
(b) Record the transaction in Chidi’s Purchases Returns Book. (3 marks)
(c) Show the entries in Bala Merchants Account in Chidi’s ledger. (4 marks)
(d) Calculate the amount Chidi still owes Bala Merchants. (3 marks)

Examiner’s Tip: For part (a), include all essential details of a debit note – heading, date, debit note number, recipient details, description of goods, amount, and reason for return. For part (c), show the credit entry from the original purchase on 10th April and the debit entry from the return on 15th April.

Memory Aids

Mnemonic: OUTWARD

• Out: Goods going out (returning to supplier)
• Unwanted: Damaged or wrong goods
• Total: Posted to credit of Returns Outward Account
• Why: Reduces what we owe suppliers
• Account: Debit supplier’s personal account
• Record: Using Debit Note as source
• Deduct: From Purchases in Trading Account

Remember:

“You give DEBIT when you give back” – When you return goods (give back), you issue a Debit Note and debit the supplier’s account.

Direction Check:
Returns OUT-ward = Goods going OUT
Returns IN-ward = Goods coming IN

Document Trick:
DEBIT Note = Debt reduced (you owe less when you return)
CREDIT Note = Customer’s debt reduced (customer owes you less when they return)

Related Topics

To fully understand Purchases Returns Book, also study these related topics:

• Purchases Book/Purchases Journal: Where the original credit purchases are first recorded before any returns
• Debit Note and Credit Note: Understand the difference and when each document is used
• Sales Returns Book (Returns Inward): The opposite of purchases returns – when customers return goods to you
• Trading Account: How purchases returns affect calculation of Cost of Goods Sold and Gross Profit
• Creditors Account: How returns reduce amounts owed to suppliers
• Allowances: When suppliers give price reduction for defective goods you keep instead of returning