Return Outward

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21 Aug, 2024

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Return outward refers to the goods a business intentionally sends back to its suppliers. This can occur due to reasons such as damaged or incorrect items, quality issues, overstock, or other valid reasons, maintaining inventory accuracy and supplier relationships. Its purpose is to address various issues with received goods, usually by the business vendors.

The significance of returns outward lies in its impact on financial accuracy, vendor relationships, and operational efficiency. For investors, accurate accounting through return outward processes ensures transparent financial reporting. Suppliers benefit from clear communication and prompt handling of returns, fostering positive relationships.

Return Outward Meaning

Return outward, also known as purchase return, refers to the process of returning goods by a buyer to the seller. This usually happens when the buyer receives defective or incorrect products or when there's an overstock.
The journal entry for a return outward (goods returned to a supplier) involves debiting the inventory or goods returned account and crediting accounts payable.
It helps in maintaining accurate financial records by reducing the amount payable to suppliers when goods are returned. And adjusts the cost of goods purchased, ensuring that financial statements reflect the actual inventory cost.

Return Outward Explained

Return outward, also known as purchase returns, refers to the return of products back to the supplier. It is a crucial aspect of a business's accounting system. When a company must return goods to its suppliers for reasons such as damaged items, incorrect deliveries, or quality issues, these transactions are meticulously recorded in a separate returns outward Journal. This specialized journal ensures that return-related information is documented distinctly from regular purchases, facilitating easier analysis and management.

From a financial standpoint, the impact of returns outward is evident in both the amounts owed to suppliers and the income statement. In cases where the original purchase was made on credit, processing a purchase return reduces the outstanding payable to the supplier. This adjustment is pivotal in maintaining accurate financial records and reflecting the true financial liability.

Furthermore, the returns outward transactions influence the income statement's cost of goods sold (COGS). COGS represents the direct costs associated with producing or purchasing goods for resale. When a purchase return occurs within the same accounting period, it acts to decrease the total COGS, providing a more accurate representation of the net cost of goods sold after accounting for returns. In essence, the accounting treatment of returns outward ensures precision in financial reporting, aligning with the principles of transparency and accuracy.

Examples

Let us look at the return outward examples to understand the concept better -

Example #1

Consider a hypothetical example -

FurnitureFusion, a furniture retailer, placed an order with its supplier, WoodCraft, for 20 dining tables at $300 each, totaling $6,000. Upon inspection at the warehouse, FurnitureFusion discovered that 3 tables had scratches on the surface.

Accounting Entries:

Initial Purchase: Purchased inventory on credit

Debit Inventory: $6,000 (Recognizing the value of the dining tables added to the stock.)
Credit Accounts Payable: $6,000 (Amount owed to WoodCraft.)

Upon Discovering the Damaged Tables:

FurnitureFusion decided to return the scratched tables to WoodCraft.

Debit Accounts Payable: $900 (3 tables x $300 each, reducing the amount owed to WoodCraft for the returned items.)
Credit Inventory: $900 (Decreasing the stock value for the returned tables.)

Operational Considerations:

FurnitureFusion may contact WoodCraft to discuss the quality issue and request replacements or a credit note.

FurnitureFusion might implement stricter quality control measures to prevent similar issues upon receiving shipments from WoodCraft.

WoodCraft could investigate the manufacturing process to identify the cause of the scratches, aiming to improve product quality and maintain a positive business relationship with FurnitureFusion.

Example #2

The other example in terms of journal entry is below -

Initial Purchase:
- Company XYZ purchased office supplies with a cost of $500 on credit, recorded as follows:
- Debit to Purchases: $500
- Credit to Accounts Payable: $500
Finds out defective supplies:
- After a few days, the company found that some of the office supplies were damaged. The company contacted the supplier and was instructed to return $100 worth of defective supplies.
Purchase Return Entry:
- The company records the return of defective supplies as follows:
- Debit to Accounts Payable: $100
- Credit to Purchases Returns: $100

The net effect on the company's accounts is calculated as:

Net Purchases = Purchases - Purchases Returns
Net Purchases = $500 - $100 = $400

Therefore, the company's net purchases for this transaction amount to $400 after considering the return of defective supplies. This adjustment ensures that the company accurately reflects the actual cost of the office supplies it intends to keep and use.

Journal Entry

The journal entry for return outward is as follows:

For a Cash Purchase Return:

Debit: Cash

Credit: Purchase Returns

For a Credit Purchase Return:

Debit: Accounts Payable

Credit: Purchase Returns

The journal entry for return outwards (or purchase return) involves recording the return of goods from a buyer to the seller. Recording the journal entry against it helps maintain accurate financial records and reflects the decrease in the cost of goods purchased due to the returned items.

Frequently Asked Questions (FAQs)

1. Where is return outwards recorded in final accounts?

Returns outwards means purchase return; the entries of it are recorded as a credit in the "Purchases Returns" or "Returns Outwards" account. This credit entry helps to reduce the total purchases in the trading account, reflecting the decrease in the cost of goods purchased due to the returned items.

2. What is return inward vs. return outward in accounting?

In accounting, "return inwards" refers to goods or merchandise returned to a business by its customers. This also indicates the sales returns or returns from customers. On the other hand, "return outwards" pertains to goods sent back by the business to its suppliers. This is commonly the purchase returns or returns to suppliers.

3. Why is return outwards credited?

Return outwards is credited in accounting to reflect a reduction in purchases. When a business returns goods to its suppliers, it decreases the total amount spent on purchases. Crediting the "Returns Outwards" or "Purchases Returns" account effectively subtracts the value of returned items from the overall purchases, providing a more accurate representation of the net cost of goods acquired.