## **Learning Outcomes**

After studying this article, you will be able to define and explain purchase returns and debit notes, describe their typical supporting documents, and record the correct double entry for returns to suppliers in both journals and ledgers. You will also understand how these adjustments impact the payables balance and the trial balance for the ACCA Maintaining Financial Records (FA2) exam.

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

For ACCA Maintaining Financial Records (FA2), you are required to understand payables processing with a particular focus on purchase returns and debit notes. This article covers the following syllabus areas:

- Record purchases returns in the appropriate books of prime entry and general ledger accounts
- Describe and account for debit notes and other supporting documentation for purchase returns
- Make the correct double entry for purchase returns and their effect on the trade payables balance
- Recognise the impact of purchase returns and debit notes on the preparation of the trial balance

## **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 goods are returned by a business to its supplier, which document is typically initiated by the business?
   a) Credit note  
   b) Sales invoice  
   c) Debit note  
   d) Remittance advice

2. What is the correct double-entry to record purchase returns in the general ledger for goods returned on credit?
   a) Debit Purchases, Credit Payables  
   b) Debit Payables, Credit Purchases Returns  
   c) Debit Purchases Returns, Credit Payables  
   d) Debit Sales, Credit Payables

3. True or false? Purchase returns increase the balance of trade payables in the statement of financial position.

4. Briefly explain the difference between a debit note and a credit note in the purchase returns process.

## **Introduction**

In accounting, not all purchases are final—sometimes goods purchased from suppliers are returned due to faults, incorrect items, or damages. Accurate processing and recording of these returns are essential for reflecting the correct payables balance and preparing reliable financial statements. The process involves specific documents such as debit notes and credit notes, and requires careful double-entry bookkeeping to maintain accurate records and meet ACCA exam requirements.

This article explains how to document and account for purchase returns, describes the function of related documents, and provides worked examples to strengthen your understanding.

> **Key Term: purchase returns**
> Goods previously bought from a supplier that are returned, often because they are damaged, unsuitable, or were supplied in error.
>
> **Key Term: debit note**
> A document issued by a buyer to inform the supplier of goods returned and to request a reduction in the supplier's account.
>
> **Key Term: credit note**
> A document issued by the supplier to record the reduction in the amount owed by the buyer, confirming the purchase return.

## **Documenting Purchase Returns**

Purchase returns must be properly documented to provide evidence of the goods returned and authorisation for adjusting the payables balance.

- The process usually begins with the buyer (the business) preparing a **debit note**. This is sent to the supplier, detailing the items returned, quantities, reasons, and references to the original purchase invoice.
- On receipt of the returned goods and the debit note, the supplier will issue a **credit note** to confirm acceptance of the return and reduction of the amount due.

In practice, these documents form part of the audit trail and support the postings in the books of prime entry and the general ledger.

## **Recording Purchase Returns in the Books**

Purchase returns are first recorded in the returns outwards (purchase returns) day book. The information from the returns outwards day book is then posted to the general ledger, affecting both the payables and the purchases returns accounts.

### Double-Entry for Purchase Returns

When goods are returned to a supplier (original transaction was on credit):

- **Debit** Trade Payables (liability decreases)
- **Credit** Purchases Returns (reduces cost of purchases in the income statement)

If the return is for goods bought for cash, the entries are:

- **Debit** Cash/Bank (asset increases)
- **Credit** Purchases Returns

### **Worked Example 1.1**

A business returns inventory costing \$800 (originally purchased on credit) to its supplier due to defects. Show the correct double-entry.

> **Answer:**
>
> - Debit Trade Payables \$800 (to reduce the amount owed)
> - Credit Purchases Returns \$800 (to record the return and reduce purchases expense)

## **Effects on the Payables Balance and Financial Statements**

Properly recording purchase returns ensures:

- The trade payables (liabilities) reflect only amounts actually owed to suppliers after considering returns.
- Purchases returns reduce the net cost of purchases in the income statement, which in turn improves gross profit.
- The purchases returns account is typically cleared to the income statement at the year-end.

### **Worked Example 1.2**

In the trial balance, Purchases total \$50,000, Purchases Returns are \$2,000, and Trade Payables have a credit balance of \$8,000. If additional returns of \$500 are made just before year-end but are not yet posted, what is the corrected payables balance?

> **Answer:**
> The \$500 return reduces the amount owed. Corrected Trade Payables balance = \$8,000 – \$500 = \$7,500.

### **Exam Warning**

Failure to record purchase returns promptly can result in overstating trade payables and understating profit. Always ensure debit notes and credit notes are matched and correctly posted before preparing the trial balance.

## **Summary**

Purchase returns are handled using specific documents (debit notes, credit notes) and are recorded in both the books of prime entry and the general ledger. Correctly recording purchase returns ensures payables, purchases, and the trial balance are accurate, supporting a fair presentation in the financial statements.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define purchase returns, debit notes, and credit notes
- Identify the flow of documents supporting purchase returns
- Post the correct double-entry for returns to suppliers
- Explain how purchase returns affect trade payables and profit
- Recognise the impact on the trial balance and the importance of prompt posting

## **Key Terms and Concepts**

- purchase returns
- debit note
- credit note

Payables processing - Purchase returns and debit notes