## **Learning Outcomes**

After studying this article, you will be able to explain the purpose of sales and purchases returns books, distinguish them from other prime records, record appropriate entries, and post these transactions correctly to the general ledger. You will recognize the double-entry impacts of returns, handle related credit notes and debit notes, and answer ACCA exam questions on this core topic.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how transactions involving sales and purchases returns are recorded in the books of prime entry and posted to the ledger, as well as the supporting documentation used. Revision should focus on:

- Identifying and explaining different books of prime entry, including returns books
- Recording sales returns and purchases returns transactions with supporting documentation
- Understanding and processing credit notes (for sales returns) and debit notes (for purchases returns)
- Posting returns from the returns books to the general ledger accounts
- Recognising the impact of returns on sales, purchases, receivables, and payables

## **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. Which one document is used by a supplier to acknowledge the receipt and acceptance of returned goods from a customer?
   a) Purchase order
   b) Credit note
   c) Debit note
   d) Delivery note

2. What are the correct double-entry postings when a customer returns goods previously sold on credit?
   a) Debit Sales Returns, Credit Receivables
   b) Debit Purchases Returns, Credit Payables
   c) Debit Sales, Credit Sales Returns
   d) Debit Cash, Credit Sales Returns

3. True or false? Returns outwards are also known as purchases returns and reduce the total amount owed to suppliers.

4. Briefly explain how the sales returns book and purchases returns book help in preparing the financial statements.

## **Introduction**

Prime records, also known as books of prime entry, provide the starting point for accounting records by systematically recording business transactions as they occur. While the main books of prime entry—such as the sales day book and purchases day book—record the original sales and purchases, businesses regularly deal with returns. Sales returns and purchases returns books are used to document these returned goods, ensuring financial records fairly reflect the current obligations and income.

Accurate use of these returns books is key for correctly adjusting revenue, expenses, assets, and liabilities, and thus preparing reliable accounts for internal management and external users.

> **Key Term: book of prime entry**
> The initial accounting record where transactions are first entered before posting to the general ledger.

## **Sales Returns and Purchases Returns Books**

Businesses do not always keep every sale or purchase as originally recorded; customers might return goods, or a business may return goods to suppliers. These transactions require suitable documentation and specific prime books for proper tracking.

### **Sales Returns Book (Returns Inwards Book)**

This book is used to record goods returned by credit customers. The typical reasons include defective goods, incorrect supplies, or goods not matching orders. Each return should be supported by a credit note issued by the business to its customer.

> **Key Term: sales returns book**
> A prime record listing goods returned by customers, based on issued credit notes.
>
> **Key Term: credit note**
> A document issued by a supplier to confirm that a customer’s account has been credited for goods returned.

### **Purchases Returns Book (Returns Outwards Book)**

The purchases returns book records goods a business returns to its suppliers. Situations may include the receipt of faulty goods, over-supply, or incorrect deliveries. The business will create a debit note for the supplier and expect a credit note in response.

> **Key Term: purchases returns book**
> A book recording goods a business sends back to its suppliers, typically supported by debit notes and supplier credit notes.
>
> **Key Term: debit note**
> A document issued by a purchaser to notify the supplier of returned goods and request an account credit.

### How Are Returns Recorded and Posted?

Returns books summarize all returns for a period (often a week or a month). The totals are then posted to the general ledger. It is essential to distinguish “returns inwards” (sales returns) from “returns outwards” (purchases returns).

**Double-entry for Sales Returns:**

- Debit Sales Returns account (an expense, reduces total revenue)
- Credit Receivables account (reduces the amount owed by the customer)

**Double-entry for Purchases Returns:**

- Debit Payables account (reduces the amount owed to the supplier)
- Credit Purchases Returns account (reduces purchases expense)

### **Worked Example 1.1**

A business sells goods worth \$1,200 to a customer, who returns items valued at \$200 due to defects. All sales were originally on credit. What are the ledger entries for the return?

> **Answer:**
>
> - Debit Sales Returns \$200 (increases expenses)
> - Credit Receivables \$200 (customer now owes less)

The sales returns book total for the period would be posted transferring the full total to these accounts.

### **Worked Example 1.2**

A business returns \$500 of unsuitable products to one of its suppliers, having previously purchased them on credit. How is this reflected in the accounting records?

> **Answer:**
>
> - Debit Payables \$500 (reducing the liability to the supplier)
> - Credit Purchases Returns \$500 (decreasing net purchases expense)

### Supporting Documents for Returns

Correct supporting documents are mandatory for audit trails and financial control:

- **For sales returns:** The sales returns book is updated using the credit notes issued to customers.
- **For purchases returns:** The purchases returns book is prepared from supplier credit notes and business debit notes.

Care must be taken to cross-reference all returns in the books to these documents to avoid errors or omissions.

### **Exam Warning**

> Omitting to record returns or posting them to the wrong accounts can incorrectly state profits and trade balances. Always use the correct book of prime entry and posted accounts, referencing supporting credit or debit notes.

## **Summary**

Sales and purchases returns books are essential prime records ensuring that returned goods are properly accounted for, supported by appropriate documentation, and posted correctly to the general ledger. Returns reduce the reported values of sales and purchases, affect control accounts for receivables and payables, and ensure financial statements present a fair and accurate view.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define the purpose of the sales returns book and purchases returns book
- Identify which supporting documents (credit notes, debit notes) are used for each returns book
- Record sales and purchases returns transactions accurately in the books of prime entry
- Correctly post returns to the relevant general ledger accounts and understand the impact on financial statements
- Distinguish between the accounting for sales returns and purchases returns

## **Key Terms and Concepts**

- book of prime entry
- sales returns book
- credit note
- purchases returns book
- debit note

Other prime records - Sales and purchases returns books