Purchase Return as an Accounting Concept


Purchase return is an important concept in accounting that refers to the return of goods by a buyer to the seller. It occurs when the buyer is dissatisfied with the quality or condition of the goods received, or when there is a discrepancy in the quantity or type of goods delivered. In such cases, the buyer has the right to return the goods and receive a refund or credit from the seller.


1. Nature of Purchase Return:
Purchase return can be classified into two types based on its nature:
- Defective Goods Return: This occurs when the buyer returns the goods due to defects or damages in the products received. In such cases, the buyer may seek a replacement or a refund.
- Excess Goods Return: This happens when the buyer returns the goods because of an overdelivery or an error in the order. The buyer may request a reduction in the invoice or a credit note.

2. Accounting Treatment:
The accounting treatment of purchase return depends on the nature of the return and the accounting method used by the company. Generally, purchase return is recorded in the books of accounts using either the periodic inventory system or the perpetual inventory system.


1. Balance Sheet:
Purchase return affects the balance sheet in the following ways:
- Asset: If the returned goods are still in the possession of the buyer, they are considered as part of the inventory and are recorded as a decrease in the inventory asset.
- Liability: If the buyer has already paid for the goods, a liability is created in the form of accounts payable or a vendor credit. The liability is reduced when the refund or credit is received from the seller.

2. Income Statement:
Purchase return affects the income statement in the following ways:
- Revenue: The reduction in the cost of goods sold due to purchase return results in a decrease in the revenue.
- Expense: Any expenses incurred in returning the goods, such as transportation costs, may be recorded as an expense.


In conclusion, purchase return is not classified as an asset, liability, capital, revenue, or expense on its own. Instead, it affects various elements of the financial statements, such as inventory, accounts payable, cost of goods sold, and revenue. The accounting treatment and impact on the financial statements depend on the nature of the return and the accounting method used. It is essential for businesses to accurately record and track purchase returns to maintain accurate financial records and ensure proper inventory management.