How to prepare returns day books

Step by step

1. Separate the two kinds of return. Keep goods returned by customers apart from goods you return to suppliers. They go in different books.
2. Record from credit notes. Enter each return from the relevant credit note, showing the date, name and amount.
3. Total each day book. Total the returns inwards and returns outwards separately for the period.
4. Post the individual entries. Credit customers for returns inwards. Debit suppliers for returns outwards.
5. Post the totals. Debit returns inwards and credit returns outwards in the nominal ledger.

Worked example

Returns inwards of RM120 are debited to returns inwards and credited to the customer's account.

Understanding the method

Goods do not always stay sold or stay bought. When a customer sends goods back, or the business sends goods back to a supplier, the earlier sale or purchase is partly undone. There are two books for this.

The sales returns day book (returns inwards) is for goods customers send back. The purchases returns day book (returns outwards) is for goods the business sends back to suppliers.

Both are books of prime entry, and returns are corrections to earlier trading, not new trading. The source document is the credit note.

If a customer returns goods, the business sends the customer a credit note, which lowers what the customer owes. If the business returns goods to a supplier, the supplier sends a credit note, which lowers what the business owes.

The credit note total follows the value of the original invoice. If the goods were sold after trade discount, value the return on the same basis. A return must reverse exactly what was first recorded.

To decide which book, ask who is sending goods back to whom. A customer returning faulty goods is a sales return, because goods come back into the business. The business returning goods to a supplier is a purchases return, because goods go out.

Here is an example. A customer, Devi Retail, returns unsuitable goods worth RM180, and Hassan Mart returns RM95 of damaged stock. The sales returns day book totals 180 + 95 = RM275.

The business returns RM140 of wrong-sized goods to Wong Supplies and RM60 of faulty goods to Rina Trading. The purchases returns day book totals 140 + 60 = RM200.

Sales returns reduce revenue, so debit RM275 to the sales returns account. Credit each customer's account, because each now owes less. Purchases returns reduce cost, so credit RM200 to the purchases returns account.

Debit each supplier's account, because the business now owes less. Each returns book posts the opposite way to its parent day book.

Check that the customer credits equal the sales returns total, and the supplier debits equal the purchases returns total.

Common mistakes include recording a return to a supplier as if a customer had returned goods. Another is posting the sales returns total to the credit of the sales returns account. Others are netting returns off against sales or purchases instead of keeping a separate record. Some students also value a return at list price when the original sale had trade discount.

If you keep swapping returns inwards and returns outwards, we can help. One of our teachers can give you a quick way to tell them apart and test you on past-paper style questions. Book a trial class

Related skills

• How to prepare a sales day book
• How to prepare a purchases day book
• How to prepare a sales ledger control account

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.