Purchase returns definition
/What is a Purchase Return?
A purchase return occurs is when the buyer of merchandise, inventory, fixed assets, or other items sends these goods back to the seller. Excessive purchase returns can interfere with the profitability of a business, so they should be closely monitored. There are a number of reasons for purchase returns, such as the following:
The buyer initially acquired an excessive quantity, and wants to return the remainder
The buyer acquired the wrong goods
The seller sent the wrong goods
The goods have proven to be inadequate in some way
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Restocking Fees
The seller can legitimately charge a restocking fee to the buyer in exchange for agreeing to take back goods (unless the seller originally shipped the wrong goods to the buyer). The amount of a restocking fee is generally in the vicinity of 15% of the price the buyer paid for the goods being returned. This fee is typically not charged if a company offers free returns within a certain number of days of the purchase date.
Return Merchandise Authorizations
A purchase return is usually authorized under a return merchandise authorization (RMA) that is issued to the buyer by the seller. When the buyer packages the goods for return to the seller, it marks the RMA number on the outside of the package, which the seller's receiving department matches against its list of authorized and outstanding RMA numbers before accepting the receipt. If there is no RMA number, then the delivery will be rejected.
How to Compensate a Buyer for Returned Goods
The seller has several options for compensating the buyer for any returned goods, which include:
A credit against future purchases
A credit memo that the buyer can apply against its next payment to the seller
An outright cash payment to the buyer
Accounting for a Purchase Return
When the buyer records a purchase return, it can be either as a credit to its inventory account (if there are few such transactions) or to a purchase returns account (if management wants to segregate this information for further analysis). The offsetting debit is to the accounts payable account. The following sample journal entry shows how this entry might be structured for a $500 purchase return.
