Return Outwards: Meaning, Journal Entry & Example
What is Return Outwards?
Return Outwards represents the goods that a business returns to its suppliers due to various reasons, such as receiving defective products, overstocking, or ordering errors. In accounting, Return Outwards are recorded as deductions from purchases or accounts payable to reflect the decrease in inventory or the reduction in the amount owed to suppliers. The primary purpose of Return Outwards is to manage inventory levels efficiently, rectify errors in purchasing, and maintain good relationships with suppliers. It ensures that businesses only pay for goods that meet their quality standards and that they do not hold excess inventory that could tie up capital unnecessarily.
- Return Outwards play a crucial role in inventory management by allowing businesses to rectify errors in purchasing, remove defective or unwanted items, and maintain optimal inventory levels.
- Recording Return Outwards accurately is essential for maintaining accurate financial records.
- Managing Return Outwards effectively contributes to building and maintaining positive relationships with suppliers.
Table of Content
- Journal Entry for Return Outwards
- Example of Return Outwards
- Advantages of Return Outwards
- Disadvantages of Return Outwards
- Difference between Return Outwards and Carriage Outwards
- Difference between Return Inward and Return Outward
- Return Outward – FAQs
Journal Entry for Return Outwards
Example of Return Outwards
Let’s say a business returns $1,000 worth of goods to a supplier for credit. The journal entry would be,
Advantages of Return Outwards
1. Supplier Relationships: Return Outwards improves relationships with suppliers by allowing the return of defective or surplus items, ensuring effective communication and timely payments.
2. Cost Reduction: Return Outwards helps control costs by returning excess or undesired materials to suppliers, reducing inventory carrying costs.
3. Quality Assurance: Returning defective goods ensures that the business maintains high-quality standards, protecting its reputation.
4. Cash Flow Management: Return Outwards can lead to refunds or credits from suppliers, improving the business’s cash flow.
5. Risk Mitigation: Return Outwards helps manage inventory issues like overstocking or low-quality items, preventing financial and operational disruptions.
Disadvantages of Return Outwards
1. Supplier Relations Strain: Excessive use of Return Outwards can harm relationships with suppliers, leading to trust issues.
2. Restocking Fees and Charges: Suppliers may charge restocking fees for returned merchandise, reducing profitability.
3. Inventory Disruption: Replacing items through Return Outwards can disrupt inventory management, causing inefficiencies.
4. Transportation Costs: Return Outwards involves transportation costs for returning goods, adding to the overall return process cost.
5. Contractual Obligations: Return Outwards transactions must align with supplier contracts; misalignment can lead to penalties and legal issues.
Difference between Return Outwards and Carriage Outwards
|
Basis |
Return Outwards |
Carriage Outwards |
|---|---|---|
|
Definition |
Return Outwards, also known as Purchases Returns or Purchases Allowances, refers to goods that a business returns to its suppliers or vendors. |
Carriage Outwards, also known as Delivery Expenses or Freight Outwards, refers to the transportation costs incurred by a business to deliver goods from its premises to customers or other locations. |
|
Nature |
Return Outwards involve goods being sent back to suppliers due to various reasons such as defects, overstocking, or ordering errors. |
Carriage Outwards involve the costs associated with delivering goods from the seller’s location to the buyer’s location or other specified destinations. |
|
Accounting Treatment |
In accounting, Return Outwards are recorded as deductions from purchases or accounts payable to reflect the decrease in inventory or the reduction in the amount owed to suppliers. |
In accounting, Carriage Outwards are typically treated as selling expenses and are recorded separately from the cost of goods sold. These expenses reduce the gross profit of the business. |
|
Purpose |
The primary purpose of Return Outwards is to manage inventory efficiently, rectify purchasing errors, and maintain positive relationships with suppliers. |
The focus of Carriage Outwards is on covering the costs associated with delivering goods to customers or other specified locations, ensuring timely and efficient delivery of products. |
Difference between Return Inward and Return Outward
|
Basis |
Return Inwards |
Return Outwards |
|---|---|---|
|
Definition |
Goods returned by customers to the business. |
Goods returned by the business to suppliers. |
|
Purpose |
Maintain customer satisfaction, manage inventory effectively, and comply with consumer protection laws. |
Manage supplier relationships, control inventory costs, and ensure product quality and compliance. |
|
Accounting Treatment |
Debit to Return Inwards Account, credit to Customer’s Account. |
Debit to Supplier’s Account, credit to Return Outwards Account. |
|
Impact on Revenue |
Decreases sales revenue. |
Does not directly affect sales revenue |
|
Impact on Inventory |
Increases inventory (if returned goods are resalable). |
Decreases inventory. |
|
Customer Interaction |
Enhances customer satisfaction and loyalty. |
May impact supplier relationships positively or negatively depending on handling. |
|
Administrative Burden |
Requires processing returns, issuing refunds or credits, and updating inventory records. |
Involves coordinating returns with suppliers, managing transportation logistics, and complying with contractual obligations. |
|
Financial Implications |
Can lead to revenue loss and potential write-offs for devalued merchandise. |
May incur restocking fees or transportation costs, impacting profitability. |
|
Legal Compliance |
May be required by consumer protection laws or industry regulations. |
Must comply with contractual agreements and terms established with suppliers. |
Return Outward – FAQs
What is the difference between Return Inwards and Return Outwards?
Return Inwards involve goods returned by customers to the business, while Return Outwards involve goods returned by the business to its suppliers or vendors.
Why do businesses record Return Inwards and Return Outwards?
Recording Return Inwards and Return Outwards is essential for maintaining accurate financial records. It allows businesses to reflect changes in inventory, sales revenue, and accounts payable accurately.
How are Return Inwards and Return Outwards recorded in accounting?
Return Inwards are typically recorded as deductions from sales revenue and accounts receivable (or cash), while Return Outwards are recorded as deductions from purchases or accounts payable (or cash).
What are the common reasons for Return Inwards?
Return Inwards may occur due to various reasons, including dissatisfaction with the product, receiving damaged goods, incorrect delivery, or changes in customer preferences.