Recording of purchase/sales returns
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
20 April 2013
Sir,
while doing audit of a firm i observered that the Firm is issuing its Sale Invoice for the material that it is rejecting against its own purchases.And by this it is increasing its sales unnecessarily. In my opinion it is not a valid treatment of Purchase / Sales return.
What are your opinions on this point ?.
while doing audit of a firm i observered that the Firm is issuing its Sale Invoice for the material that it is rejecting against its own purchases.And by this it is increasing its sales unnecessarily. In my opinion it is not a valid treatment of Purchase / Sales return.
What are your opinions on this point ?.
20 April 2013
Actually, for purchase returns invoice must be generated both under excise and VAT and same should reflect under purchase returns.
If the company treating the same as sale, then the treatment is not correct.
If the company treating the same as sale, then the treatment is not correct.
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 April 2013
They have not maintained D3.
therefore they are recording all theres sales returns under head "purchases" against the debit note they got from the relevant party.
they are recording there purchase returns under head"sales" and saying that they have done so because they have issued the party there invoice .
please sir clarify me some more.
therefore they are recording all theres sales returns under head "purchases" against the debit note they got from the relevant party.
they are recording there purchase returns under head"sales" and saying that they have done so because they have issued the party there invoice .
please sir clarify me some more.
22 July 2025
In the situation you’re describing, the treatment of purchase returns as sales is indeed incorrect. Let's break it down and clarify the proper accounting and tax treatment for purchase returns and sales returns.
1. Purchase Return (Buyer's Perspective):
When a firm returns goods to a supplier (i.e., purchase return), the correct accounting treatment would be:
Debit: Purchase Returns (or Goods Returned) account.
Credit: Accounts Payable (the supplier's account).
This return does not increase sales but rather reduces the amount of goods purchased. If the firm is returning material that was previously purchased, it should reverse the purchase entry and not treat it as a sale.
In the case of excise duty/VAT/GST, the seller should issue a credit note reflecting the return of goods, and the buyer can reverse any input tax credit (ITC) or other taxes that were previously claimed.
2. Sales Return (Seller's Perspective):
When goods are returned by the customer, it’s a sales return, and the proper treatment would be:
Debit: Sales Returns account (to reduce sales).
Credit: Accounts Receivable (the customer’s account).
Here, the seller needs to issue a credit note for the goods returned, and any tax liability (like GST) will be reduced accordingly.
3. Mistake of Treating Purchase Returns as Sales:
In the case you're mentioning, the firm is incorrectly treating purchase returns as sales by issuing an invoice. This could lead to several issues:
Increased Sales Figures: By recording purchase returns under "sales," they are inflating their sales figures, which can affect their tax liability (e.g., GST or VAT) as well as the overall financial performance.
Tax Implications: If the firm is issuing invoices for returns and treating them as sales, it could result in the improper collection of tax (like VAT/GST) and incorrect input tax credit claims. The goods should be treated as purchases returned and not as new sales.
Legal and Audit Issues: This treatment could be considered fraudulent or misleading, as it doesn't represent the true nature of the transaction, which could lead to legal or tax complications during an audit.
4. Correct Accounting Treatment for Purchase Returns:
Purchase Return should be recorded as "Purchase Return", not under Sales.
A debit note should be issued for the returned goods, reducing the purchase value and any applicable taxes (GST/VAT).
The supplier should issue a credit note and reduce the amount payable accordingly.
5. Why It’s Incorrect:
Sales Returns represent a reduction in revenue, not an increase in sales.
Treating purchase returns as sales is misleading from both an accounting and tax perspective.
6. D3 Document (In the Context of Excise/VAT/GST):
If the company is engaged in excise, VAT, or GST, it needs to follow the relevant procedure for return of goods. In GST or VAT, returns are tracked using credit notes. If excise is involved, D3 forms may be required to ensure proper documentation of returns.
In summary:
If goods are returned by the firm to the supplier, the accounting should be:
Debit: Purchase Return account (reversing the purchase entry).
Credit: Accounts Payable to the supplier.
For tax purposes:
The supplier should issue a credit note for any taxes related to the returned goods.
The firm should reverse any ITC claimed earlier for the returned goods.
The firm should not be issuing sales invoices for returns as that would misstate their sales and tax obligations.
1. Purchase Return (Buyer's Perspective):
When a firm returns goods to a supplier (i.e., purchase return), the correct accounting treatment would be:
Debit: Purchase Returns (or Goods Returned) account.
Credit: Accounts Payable (the supplier's account).
This return does not increase sales but rather reduces the amount of goods purchased. If the firm is returning material that was previously purchased, it should reverse the purchase entry and not treat it as a sale.
In the case of excise duty/VAT/GST, the seller should issue a credit note reflecting the return of goods, and the buyer can reverse any input tax credit (ITC) or other taxes that were previously claimed.
2. Sales Return (Seller's Perspective):
When goods are returned by the customer, it’s a sales return, and the proper treatment would be:
Debit: Sales Returns account (to reduce sales).
Credit: Accounts Receivable (the customer’s account).
Here, the seller needs to issue a credit note for the goods returned, and any tax liability (like GST) will be reduced accordingly.
3. Mistake of Treating Purchase Returns as Sales:
In the case you're mentioning, the firm is incorrectly treating purchase returns as sales by issuing an invoice. This could lead to several issues:
Increased Sales Figures: By recording purchase returns under "sales," they are inflating their sales figures, which can affect their tax liability (e.g., GST or VAT) as well as the overall financial performance.
Tax Implications: If the firm is issuing invoices for returns and treating them as sales, it could result in the improper collection of tax (like VAT/GST) and incorrect input tax credit claims. The goods should be treated as purchases returned and not as new sales.
Legal and Audit Issues: This treatment could be considered fraudulent or misleading, as it doesn't represent the true nature of the transaction, which could lead to legal or tax complications during an audit.
4. Correct Accounting Treatment for Purchase Returns:
Purchase Return should be recorded as "Purchase Return", not under Sales.
A debit note should be issued for the returned goods, reducing the purchase value and any applicable taxes (GST/VAT).
The supplier should issue a credit note and reduce the amount payable accordingly.
5. Why It’s Incorrect:
Sales Returns represent a reduction in revenue, not an increase in sales.
Treating purchase returns as sales is misleading from both an accounting and tax perspective.
6. D3 Document (In the Context of Excise/VAT/GST):
If the company is engaged in excise, VAT, or GST, it needs to follow the relevant procedure for return of goods. In GST or VAT, returns are tracked using credit notes. If excise is involved, D3 forms may be required to ensure proper documentation of returns.
In summary:
If goods are returned by the firm to the supplier, the accounting should be:
Debit: Purchase Return account (reversing the purchase entry).
Credit: Accounts Payable to the supplier.
For tax purposes:
The supplier should issue a credit note for any taxes related to the returned goods.
The firm should reverse any ITC claimed earlier for the returned goods.
The firm should not be issuing sales invoices for returns as that would misstate their sales and tax obligations.
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