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Return inwards refers to returned products after being sold to the customer. This is usually done against warranty claims and outright good returns. The customer will denote transactions like a debit for accounts payable and credit for purchased inventories for the return inwards. On the contrary, return outwards refers to the return of goods from the customer base directly to the suppliers. Therefore, the return outward also includes two debit and credit transactions.
Return Inward
As the name suggests, return inwards refers to the return of goods after selling has occurred. The accounting transaction includes debit and credit. The debit will receive transactions for accounts payable, while the credit column will include purchased inventories. Return inwards might not result in a reduction in the cost of selling goods. Moreover, the return of goods does not indicate selling the same to third parties within the specified accounting period. Return inwards might not include goods that are intended for sale. It may include fixed assets or goods consumed as part of internal operations.
The returns inward will reduce fixed accounts transactions and expenses administration in nature. In simpler words, return inwards will be a receipt sent by the seller for the products sold by the buyer. Therefore, it is considered as sales returns. Sales returns are recorded for events that are provided below:
- Returning goods due to the incorrect description given by the purchaser. Further examples would include a quality, incorrect description and others.
- Returning excess goods quantity received by the buyer.
- Defective return goods.
- Returning defective goods within the warranty of the products.
- Returning sold goods that are expired.
In many cases, goods are returned to the seller if it is not of satisfactory standards or description. After the goods are received, the seller raises a credit note to the buyer. This entry is recorded within the book of accounts that completes the inward transaction. In addition, a return inward transaction is only complete if it is a recorded refund on the purchase price or goods exchange.
For example: ABC had sold 1000 sets of glass bowls to XY. On receiving, it was identified that more than 300 pieces were damaged. Thus, the buyer will be sent the goods, after which a credit note will be raised on the number of damaged products.
The journal entry for the same will be recorded as:
Return inwards A/c Dr
To XY A/c
Return Outwards
The return outwards is different from that of inward. It is resending the goods to the supplier or any other third party previously received from the buyer. In many accounts’ books and transactions, it is referred to as purchase returns.
The same logic follows of return inward while writing the transaction for outwards. The buyer will return the goods if they are not satisfied or receive inferior qualities. The outward return will be initiated within a reasonable period to receive compensation. Here, the debit note is sent to the seller and the products. The books of accounts for return outwards will be
Here ABC will be the buyer
ABC a/c Dr
To Return Outward a/c
In simpler words, the goods sent by customer is further returned to suppliers. The meaning of the journal entry for return outward is given below.
The transaction’s debit will indicate declination of revenue as the amount is returned to the customer base. In many cases, the suppliers create a reserve as a contingency plan; hence, some returns might be deducted from the reserve only. This further indicates a reduction in the reserve of suppliers.
The transaction’s credit will be done as it accounts received against unpaid invoices. It will also be treated as open credits, which are applied for future invoices. Considering the customer’s perspective, no transaction has been made as goods are returned to the seller. The return is usually before recording financial transactions.
Difference between Return Inward and Outward
Return Inward | Return Outward |
It is the receipt of returned goods from customer to seller. | Return outwards are receipts on goods received from the buyer. Here the seller will be a supplier or any third party which is the source of buying. |
The transaction is done after goods are received at the seller’s end. | Hence, it is recorded when goods are being returned from the buyer. |
Return inward will be written after writing the transaction for outward | Return outward is initiated first as the buyer returns the goods and raises a credit note for its customers. |
A credit note is raised on the buyer’s account to indicate the compensation. | Here, the supplier or seller will raise a debit note. It indicates that the buyer’s transaction has been debited. |
It will be recorded within the seller’s books of account. | It is recorded in books of accounts of a buyer. |
In the books of account, the seller’s sales will be reduced, hence creating a liability. | It will reduce the buyer’s purchase, creating an asset that is receivable from the seller’s perspective. |
Conclusion
Return inwards and outwards are referred to as different sides of the same coin. The transaction is returned inward for the buyer while outward is recorded at the seller’s account books. Writing return inwards transactions is important as it enables the managers to review the production efficiency. This will further help to identify issues repeated complaints and hence help to improve production.
