What Are Returns On Purchases?

The returns on purchases are situations in which a company or organization return products purchased from your supplier. This return may be generated as a result of the buyer having found the defective products, with different characteristics from those requested, or for other reasons.

In the scenario of a refund on a purchase, the buyer can request the supplier two actions: the return of the money paid (in case an amount has already been made), or the consideration of a lower price as compensation for the reasons of return.

returns on purchases of defective products such as a broken mobile

Return policies may vary from provider to provider. It is possible that said supplier allows returns only under certain conditions, or that it charges a special fee as a result of the return procedures.

There may also be cases in which the suppliers offer some benefit to the buyer, as an apology for the inconvenience caused. Some of these benefits can be, for example, discounts on subsequent purchases.

Reasons for returns on purchases

There can be a number of reasons why a company requests a refund on a purchase. In any case, the return policies of the suppliers must be very clear, so that the buyer knows about what situations he can claim.

The most common reasons for making returns of purchases will be described below:

Product failure

It is possible that a company requests a specific order for products and these present failures, either in terms of operation or in terms of the aesthetics of the product in question.

It may happen that all the products purchased have defective characteristics, or only a part of the batch received. And there is also the possibility that the product failures are not the same in each unit, but are different defects.

For example, a musical instrument store asks its saxophone supplier for an order of 1000 tenor saxophones.

When he receives them, he observes that of the 1000 saxophones only 800 are in excellent condition: 100 have scratches on the surface, another 70 have defective keys and 30 are missing the mouthpiece reed.

Then, the owner of said store can make a refund on the purchase of the 200 saxophones that he received in poor condition.

Sending wrong products

A refund on a purchase can be made when the buyer receives products other than those requested from the supplier.

It is considered a wrong product when the ordered items are received, but with different characteristics from those requested (differences in terms of colors, sizes, dimensions, textures, etc.).

There is also the possibility of receiving products that are part of the same classification as those requested, but are not those that have been ordered (request nails and receive screws, or buy shirts and receive sweaters).

Another valid option to make a return on a purchase is to receive products that have nothing to do with what was requested. This can happen especially when suppliers have a wide range of products within their offering.

For example, a swimming supply store contacts its swimsuit supplier and requests 100 black men’s swimsuits.

When the order is received, the buyer notices that all the swimsuits are in excellent condition, but 20 of them are dark blue.

In this case, the buyer has the option of requesting a refund on the purchase of such swimsuits.

The product does not match what was offered

It may happen that a company purchases a specific product with the knowledge that it has certain characteristics and functions.

If the buyer receives the product and considers that it does not comply with the characteristics offered, or perceives that it will not really be useful for the objective that has been set, he can make a refund on the purchase of said product.

For example, an appliance store asks its vacuum supplier for an order for 500 cordless vacuum cleaners of a specific brand.

At the time of purchase, the seller informed the buyer about the characteristics of the product, and indicated that the battery of the vacuum cleaner will allow a continuous use of 1 hour.

When the order is received in the store, the buyer tests the product and notices that the vacuum cleaner only works efficiently during the first fifteen minutes of use.

This is reason enough for the buyer to request a refund on the purchase of these vacuum cleaners, having realized that the product is not what he expected.

The buyer has changed his mind

As mentioned above, the return policies of each supplier should be very specific as to the situations in which they will accept a return on a purchase.

There are companies whose return policies are so broad that they allow a product to be returned for almost any reason, as long as the product has not been damaged by the buyer and a certain period of time is respected.

For example, a chocolate shop orders 1000 pieces of chocolate with dulce de leche. Parallel to this request, the store conducted a survey of its regular customers in which it asked them about the products they would like to purchase in the store.

The store receives the results of this survey, which show that customers want to consume healthier options.

Given this information, the owners of the chocolate shop decide to make a refund on the purchase of the pieces of chocolate with dulce de leche.

How are returns on purchases accounted for?

Returns on purchases must be accounted for in a business’s accounting for several reasons.

In the first place, because they are part of the sales movements of a company, even when no purchase has actually been made, because the merchandise has been returned.

And secondly, it is important to identify the reasons why such returns are made.

These can occur for different reasons, as described above, and knowing these reasons will give important information about the company, the behavior of the clientele, the effectiveness of the suppliers, among other data.

Returns on purchases are reflected in gross sales (total amounts related to sales made in a given period), and not in net sales (generated after deducting discounts and other deductions from gross sales).

References

  1. “Description of the subaccounts of the Income Statement” at Universidad Autónoma Metropolitana. Retrieved on September 8, 2017 from Universidad Autónoma Metropolitana: azc.uam.mx.
  2. “General Accounting” at the Inter-American University for Development. Retrieved on September 8, 2017 from the Inter-American University for Development: unid.edu.mx.
  3. Horngren, T. “Introduction to Financial Accounting” (1999) in Google Books. Retrieved on September 8, 2017 from Google Books: books.google.co.ve.
  4. Walsh, J. “Purchase Return & Allowances: Definition & Examples” in Study. Retrieved on September 8, 2017 from Study: study.com.
  5. “Purchases Returns or Returns Outwards Journal” in Accounting Explanation. Retrieved on September 8, 2017 from Accounting Explanation: accountingexplanation.com.
  6. “Purchase returns” (March 17, 2012) in Accounting Tools. Retrieved on September 8, 2017 from Accounting Tools: accountingtools.com.
  7. “What is PURCHASES RETURNS AND ALLOWANCES?” in The Law Dictionary. Retrieved on September 8, 2017 from The Law Dictionary: thelawdictionary.org.
  8. “Purchase Returns or Return Outwards” in Financial Accountancy. Retrieved on September 8, 2017 from Financial Accountancy: financielaccountancy.org.
  9. “What is a purchase return?” in Accounting Coach. Retrieved on September 8, 2017 from Accounting Coach: accountingcoach.com.
  10. “Difference between gross and net” in Economipedia. Retrieved on September 8, 2017 from Economipedia: economipedia.com.

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