PURCHASE RETURN RECORDED AS SALES

While auditing i found that , HO sales goods to its branches through a sales tax invoice and records sales and branch records purchase.
At year end the stock which is unsold at year end at branch level is sent back to HO for that they make sales tax invoice to HO and record it as sales and HO records it as purchase. Is this treatment correct?? In my opinion HO should make credit note for the same and record it as sale return whereas branch should record it as purchase return !!!


note : HO and branch are in different states
Replies (1)

Hey Ansh! Your observation is spot on. Here’s a detailed explanation:


Scenario Summary:

  • HO sells goods to branch (in another state) → treated as interstate sale by HO and purchase by branch.

  • At year-end, unsold stock is sent back by branch to HO.

  • The branch raises a sales tax invoice to HO and records it as sales.

  • HO records it as purchase.

  • You feel it should be recorded as sales return by HO and purchase return by branch.


Correct Treatment:

  1. Interstate transactions between HO and branch are treated as sales and purchases, so initial treatment is correct.

  2. For return of goods from branch to HO:

    • It is not a fresh sale/purchase, but a return of goods previously sold.

    • Therefore, HO should issue a credit note (not a fresh invoice) to the branch.

    • HO should reduce its sales (sales return).

    • Branch should record it as purchase return (not sales).

  3. Raising a fresh sales invoice for goods returned creates incorrect revenue and purchase entries on both sides.

  4. This is important especially for interstate transactions (GST/previous sales tax):

    • Correct credit notes ensure input tax credits and tax liability adjustments are properly recorded.

    • Incorrect invoices may lead to taxation on nonexistent sales.


Conclusion:

Your opinion is correct and aligns with standard accounting and tax practice:

  • HO should issue a Credit Note to branch for goods returned.

  • HO records Sales Return, reducing sales.

  • Branch records Purchase Return, reducing purchases.

  • Do not record it as fresh sales/purchases.


If the branch and HO are in different states, this is critical for proper GST compliance and avoiding tax disputes.

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