Manufacturing and trading companies exchange a variety of goods in their business dealings. The output of one entity becomes the input for the next, and so on, producing an industry-wide supply chain.
The commodities sold must meet the standards of the customers in order for this supply chain to run smoothly. As a result, purchase and sale agreements include clauses that allow for the return of products sold under certain terms and conditions.
Buyer-initiated returns are referred to as return outwards or purchase returns, while seller-initiated returns are referred to as return inwards or sales returns. The article "return inwards Vs return outward" compares and contrasts the meanings of these two phrases.
Definitions Of Terms
What is Sales Return?
Return inwards, also known as sales returns, is the receipt back by the seller of goods sold to the buyer. Return inwards can take place for the following reasons:
- The buyer returns erroneous items – such as goods of different quality, incorrect descriptions, and so forth.
- Excess products delivered to the buyer are returned to the seller.
- Return of sold products that are defective
- Return of products that have developed issues during the warranty period
- Return of sold items that have expired
When a seller sells goods, it is possible that the buyer will be dissatisfied with the things acquired. In such cases, the buyer is the one who initiates a return. When the seller receives the products back, a credit note is issued to the buyer, and an entry is made in the books, completing the return inward transaction.
A successful return inwards transaction can result in a refund of the purchase price or an exchange of products.
Example of return inwards
M/s ABC, a crockery maker, sold 10,000 ceramic bowls for USD 2 per unit to M/s XYZ, a customer. M/s XYZ discovered 500 units in damaged condition during their examination of the delivery. The process of returning these 500 units has begun.
When the seller receives the products back, the seller (M/s ABC) will issue a credit note for USD 1,000 to the buyer (M/s XYZ), and the following record will be made in the seller's books:
- Return inwards account* …..1,000 [Dr]
- Debtor account (M/s XYZ)…..1,000 [Cr]
(Being damaged goods sold to M/s XYZ received back)
* In the seller's trading account, the return inwards is subtracted from total sales.
What is purchase Return?
Also known as return outwards, purchase returns is the sending out of products by the buyer to the seller from whom they were purchased.
The reasons for the buyer initiating a return outwards transaction are identical to those listed above in the section on sales returns or return inwards.
A return outwards transaction is initiated when the customer is dissatisfied with the products acquired owing to quality or quantity difficulties, or when the goods purchased develop a fault during the exchange warranty period. The products are sent to the seller accompanied with a debit note, and an entry for the return outwards is made in the seller's books.
Example of return outwards
Using the same scenario as before, M/s XYZ issues a USD 1,000 debit note to the seller, returns the goods, and records the following entry in its books:
- Creditor account (M/s ABC)…..1,000 [Dr]
- Returns outwards account*…..1,000 [Cr]
(Being damaged goods purchased from M/s ABC, returned back)
*In the buyer's trading account, the return outwards is subtracted from total purchases.
Difference Between Purchase Returns And Sales Returns
The following are the main differences between return inwards and return outwards:
- Return inwards is the receipt by the seller of products that were originally sold to the buyer but were returned to the seller due to the sale of defective, excess, or erroneous items.
- Return outwards is the return of products by a customer to the seller from whom they were originally purchased.
2. Transaction trigger
- When sold goods are returned to the seller, this is known as return inwards.
- When a buyer returns purchased goods, this is known as return outwards.
- Return inwards occurs after return outwards, since the products can only be accepted by the seller after they have been returned by the buyer.
- Return outwards happens first, the point that the customer returns the acquired products.
4. Accompanying documentation
- To complete a return inwards transaction, the seller issues a credit note to the buyer, stating that the amount of the goods returned has been credited to the buyer's account in the seller's books.
- To complete a return outwards transaction, the buyer issues a debit note to the seller, showing that the amount of the items returns has been deducted from the seller's account in the buyer's books.
5. Entry in books of accounts
- The seller's books of accounts reflect the return inwards.
- The buyer's books of accounts record the return outwards.
6. Impact on books of accounts
- Return inwards reduces the seller's sales. It also establishes a liability on the books in the form of a payable in the buyer's favor.
- The buyer's purchases are reduced when they return outwards to the seller. It is an asset in the books in the form of a seller's receivable.
7. Disclosure in the financial statements
- Return inwards is shown in the seller's trading account as a reduction from sales which will arrive at Net sales.
- Returns outwards are recorded as a reduction from purchases in the buyer's trading account.
- When products are returned inwards, the sales earnings are refunded or the goods are resold.
- Returning products outwards results in the customer receiving a refund of the purchase price or receiving new goods in exchange.
Conclusion: Sales Return vs. Purchase Return
Purchase returns and sales returns are two sides of the same return transaction. For the seller, what is return outwards to the buyer will be return inwards. Keeping a detailed record of return inward transactions is beneficial to management because it allows them to monitor the efficacy of their production and detect problems, particularly recurring ones, with any of their production lines.