Business transactions of manufacturing and trading entities involve an exchange of different types of goods. Output of one entity becomes input for the next and so on, forming a supply chain across the industry. To ensure smooth functioning of this supply chain, goods sold must meet the requirements of the buyers. Purchase and sale agreements thus have provisions for return of goods sold, under stipulated terms and conditions.
Returns initiated by the buyer being termed as return outwards and returns received back by the seller being termed as return inwards. The article “return inwards vs return outwards” looks at meaning of and differences between these two terms.
Definitions and meanings
Return inwards:
Return inwards is the receipt back by the seller, of goods sold to the buyer. It is also termed as sales returns. Return inwards can take place for several reasons including:
- Return of incorrect goods by the buyer – such as goods of different quality, wrong description etc.
- Return of excess quantity of goods delivered to the buyer
- Return of defective goods sold
- Return of goods in which defects have arisen within warranty period
- Return of expired goods sold
When goods are sold by the seller, instances may arise wherein the buyer is not satisfied with the goods received. In such situations, a return is initiated by the buyer. When the goods are received back by the seller, a credit note is raised on the buyer and entry is recorded in the books which completes the return inwards transaction.
A completed return inwards transaction may result in either of the following – refund of purchase price or exchange of goods.
Example – return inwards
M/s ABC, a crockery manufacturer, sold 10,000 ceramic bowls to its customer, M/s XYZ for USD 2 per unit. On inspection of the consignment, M/s XYZ found that 500 units were received in damaged condition. A return of these 500 units was initiated.
Once goods are received back by the seller, a credit note for USD 1,000 will be raised by the seller (M/s ABC) on the buyer (M/s XYZ) and the following entry is passed in the seller’s books:
Return inwards a/c*…..1,000 [Dr]
Debtor a/c (M/s XYZ)…..1,000 [Cr]
(Being damaged goods sold to M/s XYZ received back)
* Return inwards is reduced from total sales figure in the trading account of the seller.
Return outwards:
Return outwards is the sending out of goods, being returned back by the buyer to the seller from who they were purchased. Return outwards is thus also termed as purchase returns.
The reasons for initiating return outwards transaction by the buyer are similar to those specified above, in the discussion on return inwards.
When the buyer is not satisfied with the goods purchased due to quality or quantity issues or goods purchases subsequently develop a defect within the exchange warranty period, a return outwards transaction is initiated. The buyer sends the goods to the seller, along with a debit note, following which an entry for the return outwards is passed in its books.
Example – return outwards
Continuing the same example as above, M/s XYZ raises a debit note for USD 1,000 on the seller, sends the goods back and passes the following entry in its books:
Creditor a/c (M/s ABC)…..1,000 [Dr]
Returns outwards a/c*…..1,000 [Cr]
(Being damaged goods purchased from M/s ABC, returned back)
*Return outwards is reduced from total purchases figure in the trading account of the buyer.
Difference between return inwards and return outwards
The key points of difference between return inwards and return outwards have been detailed below:
1. Meaning
- Return inwards is a receipt back of goods by the seller, originally sold to the buyer, due to sale of defective, excess or incorrect goods.
- Return outwards is the return back of goods by a buyer to the seller from whom they were originally purchased.
2. Transaction trigger
- Return inwards occurs when sold goods are received back by the seller.
- Return outwards occurs when purchased goods are returned back by the buyer.
3. Hierarchy
- Return inwards occurs after return outwards as only after the goods are sent back by the buyer, can they be received by the seller.
- Return outwards occurs first, when the buyer returns back the purchased goods.
4. Accompanying documentation
- To complete a return inwards transaction, the seller raises a credit note on the buyer indicating that the buyer’s account has been credited in the seller’s book for the amount of the goods returns.
- To complete a return outwards transaction, the buyer raises a debit note on the seller indicating that the seller’s account has been debited in the buyer’s books for the amount of the goods returns.
5. Entry in books of accounts
- Return inwards is recorded in the books of accounts of the seller.
- Return outwards is recorded in the books of accounts of the buyer.
6. Impact on the books of accounts
- Return inwards reduces sales of the seller. It also creates a liability in the books – a payable in favor of the buyer.
- Return outwards reduces purchases of the buyer. It also creates an asset in the books -a receivable from the seller.
7. Disclosure in the financial statements
- Return inwards is disclosed as a reduction from Sales in the trading account of the seller.
- Return outwards is disclosed as a reduction from Purchases in the trading account of the buyer.
8. Consequences
- Return inwards results in refund of sales proceeds or re-sale of goods.
- Return outwards results in receipt back of purchase amount paid or receipt of new goods in exchange, by the buyer.
Conclusion – return inwards vs return outwards:
Return inwards and return outwards are essentially legs of the same return transaction. What is return outwards for the buyer will become return inwards for the seller. Keeping a comprehensive record of returns inward transactions is important for management as it helps to assess the efficacy of its production and helps identify issues, especially recurrent ones with any of its production lines.
