Returns inwards or Sales return

What is return inwards? Definition

If sold goods are found defective, unsatisfactory or excess in quantity, they are returned by the buyer, it is called sales return or returns inwards.

Explanation

occasionally goods sold to debtors on credit may be returned by them for various reseasons, viz, if the goods are defective, or in excess of their order, or are other than the ones ordered, etc. On certain occasions, a trader may find that the amount charged by him in a particular invoice may have to be reduced, or even totally nullified. The reasons may be:

  • If the goods are returned.
  • If there is an error in the invoice, changing an amount higher than the correct amount.
  • If the goods are defective and the seller agrees to reduce the price rather than ask for their return.
  • If the invoice doesn’t allow sufficient trade discount, or if after the issue of the invoice, the seller agrees to increase the rate of trade discount.

You will recall that the customer’s account is debited when an invoice is issued to him. Thus, order to reduce the amount of debt in the account, the seller will need to credit the personal account of the customer returning the goods/or being allowed a reduction in amount charged by an invoice. This he does by issuing the debtor with a credit note. A credit note is therefore opposite in effect to an invoice. An invoice debits the customer making him liable to pay the amount whereas a credit note credits the customer absolving him from the responsibility of paying the stated amount. All credit notes issued to customers are recorded in the Returns Inwards Book. It is important to note that all credit note, issued for whatever purpose (whether for return of goods, or for correction of an error, or for grant of extra trade discount, or for any other reason) are entered in this book, which is also known as returns inwards and Allowance Made Book.


Reasons for Sales return or returns inwards

Generally, goods are returned by the customers due to the following reasons:

  1. When goods are defective
  2. goods are not according to specification.
  3. When goods are damaged.
  4. When goods are below standard.
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Example

Record the following transactions in the Returns Inwards Book of John.

August 2: 

  • Goods returned by Muller, a debtor, gross value $500, on which 20% trade discount had been allowed. (Cr. Note No. 732)

August 5:


  • Harry, a debtor, was allowed a reduction of $1,210 in an invoice issued to him earlier. (Cr. Note No. 733).

August 10:

  • Goods returned by David, net value $680, (Cr. Note No. 734).

August 17:

  • Michel was issued with an invoice for $2,400 without any trade discount. he pointed out the error and was issued with a Cr. Note No. 735, allowing 25% trade discount on the invoice.

August 25:

  • Teena was sold goods for $8,600. Some of these goods reacher her in a damaged state. Lawrence agreed to allow a reduction of $1,400 and issued her Cr. Note No. 736.

The Return Inwards or Sales Return Book of John will appear as follows:

Return Inwards or Sales Return

Notes:

  • Muller returned goods with a gross value of $500. As he had been allowed 20% trade discount, the net value of these goods as charged to him, was $500 less 20% trade discount = $400 which is now credited to him.
  • The figure of $600 is 25% of 2,400, the gross value of the invoice.

Posting Return Inwards Book to Ledger

When the Return Inwards Books reaches the Ledger Clerk, he:

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(a). debits the returns inwards account in the ledger with the total of the book, inserting the appropriate folio number in return inwards book.

(b). credits the personal account of each individual debtor with the amount of credit note issued to him, and inserts the appropriate folio number in the returns inwards book.

Thus the total debit ( in returns inwards account) equals the total of credit entries made in the personal accounts of all relevant debtors.

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