PURCHASE RETURN RECORDED AS SALES

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.