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Level 1 daft question RE: Returns

  • 24 posts
  • # 78594

I have just got the the point in my course where I am covering purchases, sales and returns.  In the book it gives the example of a purchase being made by a business of £1000 of stock from R Squid ltd in cash, but then later £100 worth of that stock is found to be faulty and must be returned. The debit entry for this return is then entered into an account called R Squid ltd for the £100.  Now it may sound like a silly question, but I was wondering, why is this not just debited back to the cash account? I hope that makes some kind of sense Smile

Jayne
Theresa
  • Member
  • 495 posts
  • # 78601

The straight answer is that the stock is not returned for cash :)

Returns of this type are often shown as a credit note from the supplier, the value then being deducted from a future payment or purchase. 

The entries therefore would be

Buy stock for cash

Dr Purchases £1000
Cr Cash £1000

Return some of the stock...

Dr Supplier £100
Cr Purchase Returns £100

Note the Purchase Returns  You do not credit Purchases. It is important for a business to know both the amount of goods they purchase and the value of the returns that they make.

Hopefully that helps :)

 
  • 24 posts
  • # 78602

Thanks that does make sense, but would this also work for a customer of the business who is returning faulty goods for a refund?  The example in the course material says to debit sales returns and credit the customer, however surely this wouldn't work in the cash of a customer who was returning goods for a cash refund to a shop?  Sorry if I am over confusing the issue here. Just seems to be taking a bit of getting my head around this part.  Thanks for the help!

Jayne
Theresa
  • Member
  • 495 posts
  • # 78603

Embersaid:

“Thanks that does make sense, but would this also work for a customer of the business who is returning faulty goods for a refund?  The example in the course material says to debit sales returns and credit the customer, however surely this wouldn't work in the cash of a customer who was returning goods for a cash refund to a shop?  Sorry if I am over confusing the issue here. Just seems to be taking a bit of getting my head around this part.  Thanks for the help!

Jayne”

You have two types of return in your question and it depends on what sort of return is being made.  This is where the terminology can get a little unclear (and I had problems with this once too).

Shops accept returns (usually) in two ways, with invoice for cash or credit and sometimes without invoice for credit - you might have come across this at say M&S at Christmas - you get a gift recipt which you need to show with the purchase if a refund or exchange is needed? No recipt - no refund.

There are also a couple of ways for a shop to sell, and some shops will do both methods, in cash at a till or on credit, i.e. an invoice is raised with the amount owing to be paid at a future point, usually within 30 days.

So if a customer returns something it will be dealt with in one of two ways either a cash refund or a credit note

For a cash refund

Dr Sales Returns
Cr Cash

for a credit return

Dr Sales Returns
Cr Customer account 

Because the first example was talking about credit returns for stock so this example follows the same thinking and customer returns are a credit note.

While it is possibly not necessary to go into this level of detail for lv1 it is best to get the fundamental things in place before trying to build on them - so not a daft question and keep them coming :)
 
Theresa
  • Member
  • 495 posts
  • # 78605

Ok - thought I recognised the question!

May I refer you to page 22, sections 3 and 4?  As you noted they only show the credit return examples but they do say in section 4 that the credit entry can be either a cash or credit return depending on how the goods were sold originally. 
  • 24 posts
  • # 78608

Thank you Thersa that makes things much clearer. That's more or less as I thought it would work, but in the course material it didn't seem very clear whether the customer had been refunded cash or with a credit note.  As the example sale was a cash sale, I assumed that perhaps a cash refund would be given.  I currently work doing minor office jobs in my hubbys butchers shop, so mostly customers here are refunded in cash. When dealing with suppliers however, it is mostly on account so it is useful to understand both ways :-)

Thanks again for the help!

Jayne
Theresa
  • Member
  • 495 posts
  • # 78615

No problem Jayne :)

Sometimes it is just a different set of words to describe the same thing that is all that is needed to make it all make sense.

In this instance I personally thing the course notes could have been a little clearer as it starts out with cash, moves promptly to credit and then sticks with credit, totally ignoring the original cash payment in favour of 'if he bought on credit...'

I have been 'playing' with books since I was 12 when Dad got me to help him with the local RSPB Club accounts so double entry and cash accounting is something that is automatic after 30 odd years. I'm only just getting round to formalising it all now my kids are at school.

Theresa 
  • 24 posts
  • # 78696

Thanks Theresa, you've been a big help :-) I agree the course material did confuse the issue a little there.

Must be so useful having such a background in the subject!

Thanks again

Jayne
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