CHAPTER 13 Flashcards
Purchase return
the return of stock by our firm to a trade creditor. This will reduce the quantity of stock on hand and the amount owed to the trade creditor. It will also affect the balance of the GST Clearing account.
Sales return
The return of stock to our firm by a trade debtor. A sales return will increase stock on hand, but reduce debtors and also profit.
Reasons for returns of stock
- the stock is faulty/ damaged
- the stock is the wrong size/colour/shape/model
- too many items of stock were purchased
- the customers have simply changed their mind.
Credit note
a source document that verifies the return of stock either to a trade creditor or by a trade debtor. Every credit note must identify the type and quantity of stock returned; the name of the customer who is returning the stock; and the reason for the return.
Purchase returns and fifo
The credit note must identify the cost price of the stock that is being returned. This means that returns may come from the stock that was purchased first but, equally, may come from newer batches of stock. Effectively, FIFO is not applied to purchase
returns.
Reporting purchase returns
Because a purchase return does not affect any revenue or expense items, and does not involve a cash flow, it will not be reported in either the Cash Flow Statement or the Income Statement. In fact, it will not be reported anywhere. A purchase return will change the balances of Stock Control, Creditors Control and GST Clearing in the Balance Sheet, but will not be reported as a separate item
Sales returns and fifo
The key principle behind recording a sales return is that the stock card should be returned to the position it would have been in if the sale had never taken place. In practice, this means that Sales Returns should value stock at the cost price used in the most recent transaction in the Out column. If the most recent sale involved two different cost prices, then a reversal of FIFO assumes that the /ast stock out is the first stock to be returned.
Sales returns as an indicator
The “value and number of Sales Returns can be an important indicator of the quality and suitability of the stock that is being traded. If Sales Returns are high, it may indicate customer dissatisfaction with the goods that are being sold. This may be because the goods are of inferior quality, or simply because customers have been provided with goods that did not suit their purpose
Reporting sales returns
In order to investigate the cause of high Sales Returns the owner must first be aware that Sales Returns are indeed a problem. This is why Sales Returns are recorded in their
own separate ledger accont, and reported separately in the Income Statement.
Income statement cost of sales sales returns
The Cost of Sales is not reported any differently~ as the effect of any Sales Returns wliI have atready been recorded n the Cost of Sales accont, and accounted for in the figure closed to the Profit ad Loss Summary account.
Net sales
Sales revenue after the deduction of sales returns.
Explain the impact of a purchase return on the income statement
No impact since a purchase return is neither a revenue or expense item. A purchase return decreases stock control and creditors control and increases GST liability. It has no impact on owners equity thus it cannot be a revenue or an expense.
Explain the impact of not recording a purchase return on the balance sheet
Assets: Stock Control would be overstated $x.
Liabilities: Creditors Control overstated $x. GST Clearing liability understated $x thus net impact on liabilities is to overstate $x.
Owners equity: no impact.
Impact of sales returns on the accounting equation
ASSTES Increase stock control $X, decrease debtors control $X. Net decrease $X.
LIABILITIES Decrease GST clearing $X.
OWNERS EQUITY Decrease $X due to sales returns. Increase $X due to decrease in cost of sales. Net decrease $X.
Stephanie is considering recording sales returns by debiting Sales rather than using a Sales Return account. Advise Stephanie.
Both methods will lead to the same value of net sales hence gross and net profits. Using a separate sales returns account is preferred since this will be reported in the Income State- ment as a separate value and provide stakeholders with more useful information. Stake- holders could track changes in sales returns overtime to assess performance. This would be impossible if no separate sales returns account was used.
