## **Learning Outcomes**

After reading this article, you will be able to explain and apply key procedures for returns outward and purchase allowances in the ACCA FA1 context. You will distinguish between returns outward and purchase allowances, identify the correct documentation, and record the impact of these transactions in the accounting records, including supplier credit notes.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand the documentation and recording of all stages of the purchasing cycle, including how to process returns to suppliers and recognize allowances.

- Identify and describe the source documents for returns outward and purchase allowances
- Explain and record the procedures for returning goods to suppliers
- Recognize the purpose and content of supplier credit notes
- Enter supplier credit notes and allowances into the accounting system
- Show the effects on the purchases and payables accounts

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When a business returns faulty goods to its supplier, which document does the supplier issue to adjust the amount owed?
   a) Purchase invoice  
   b) Sales order  
   c) Credit note  
   d) Remittance advice

2. What is the immediate impact on the payables account when a supplier credit note is received and recorded?
   a) Payables increase  
   b) Payables decrease  
   c) Purchases increase  
   d) No effect

3. True or False? An allowance from a supplier (rather than a physical return) is always supported by a credit note.

4. List one common reason for returning goods to a supplier.

## **Introduction**

Returns outward and purchase allowances are an essential part of the purchasing cycle for almost all businesses. Mistakes, incorrect deliveries, or damaged goods mean that sometimes goods must be sent back to a supplier, or an allowance claimed without returning the item. For ACCA FA1, you must understand the correct documentation, the effect on accounting records, and the role of supplier credit notes.

> **Key Term: returns outward**  
> Goods returned by a business to its supplier, usually because they are faulty, incorrect, or not required.
>
> **Key Term: purchase allowance**  
> A reduction in the amount owed to a supplier, granted as compensation for issues such as damaged goods, usually without an actual physical return.
>
> **Key Term: credit note**  
> A document issued by a supplier to acknowledge that the amount owed by the buyer is reduced, typically due to returned goods or an agreed allowance.

## **Returns Outward (Purchases Returns)**

Returns outward, also called purchase returns, occur when a business sends goods back to its supplier. This may happen for several reasons—goods may be defective, excess items might have been delivered, or the wrong item may have been received.

### The Returns Process

1. The purchaser identifies the issue and communicates with the supplier.
2. Goods are returned, usually with a goods returns note, which states what is being returned and why.
3. The supplier checks the returned goods and issues a credit note for the value of the returned items.

> **Key Term: goods returns note**  
> An internal document prepared by the purchaser recording details of goods being returned to the supplier.

## **Purchase Allowances**

Sometimes, suppliers do not require goods to be physically returned. Instead, they may offer a price reduction—called a purchase allowance—if the goods are kept despite minor defects, late arrival, or other agreed issues.

In both cases, the supplier issues a credit note, but for an allowance, the buyer retains the goods.

## **Supplier Credit Notes**

A supplier credit note works as a negative purchase invoice. It formally reduces the amount owed by the purchaser and must always be matched to the relevant invoice. Credit notes can be for full or partial returns—or for an allowance when goods are not returned but their value is reduced.

A credit note should include:

- A unique credit note number
- Reference to the original invoice
- Details and value of items returned or allowance given
- Any sales tax adjustment if applicable

### **Worked Example 1.1**

A business, Tallis Office Supplies, receives 10 printers from a supplier, but 2 are damaged. The business returns the damaged printers (cost \$80 each). The supplier inspects and issues a credit note for \$160, referencing the original invoice.

**Question:** How should Tallis Office Supplies record the credit note in the accounting system?

> **Answer:**  
> Debit Payables \$160 (to reduce the supplier balance owed)  
> Credit Purchases Returns \$160 (to recognise the reduction in purchases due to returned goods)

### **Worked Example 1.2**

Juno Retailers buys 5 office chairs at \$40 each. On arrival, 1 chair is missing a part. The supplier offers a \$10 allowance for the defect. No goods are returned. The supplier issues a credit note for \$10.

**Question:** What entries should Juno Retailers make on receipt of the credit note?

> **Answer:**  
> Debit Payables \$10 (reduces supplier liability)  
> Credit Purchases Returns or Allowances \$10 (reduces the net purchase cost)

## **Accounting for Returns Outward and Allowances**

Both returns outward and purchase allowances are recorded as reductions in total purchases. They also decrease the amount owed to the supplier (payables). The entries in the accounts for both are typically:

- Debit: Payables (to decrease amount owed)
- Credit: Purchases Returns/Allowances (to reduce purchases expense)

This ensures the financial statements reflect only goods actually retained for business use or resale.

### **Exam Warning**

> Always match the supplier’s credit note to the proper purchase invoice. Failure to do so may result in errors in the payables balance or misunderstandings during a supplier reconciliation.

### **Revision Tip**

> Returns outward and purchase allowances reduce both total purchases and payables. Treat the supplier credit note like a reverse invoice in your records.

## **Summary**

Returns outward and purchase allowances are common in business transactions and are always supported by supplier credit notes. Correctly identifying, documenting, and recording these reduces both the value of purchases and the liabilities to suppliers, ensuring accurate financial records.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define returns outward and purchase allowances
- Identify the documentation supporting each (goods returns note and supplier credit note)
- Explain the function and structure of a supplier credit note
- Record supplier credit notes in the accounting system as reductions in both payables and purchases
- Recognise the need to match credit notes to relevant purchase invoices

## **Key Terms and Concepts**

- returns outward
- purchase allowance
- credit note
- goods returns note

Purchasing cycle and documentation - Returns outward and allowances