In business, returning goods is a common occurrence. The accounting treatment of those returns, however — particularly where issue cost is concerned — can raise a number of questions and difficulties. In this article we look in detail at how to handle the difference between the value of a return and the issue cost it generates, and we walk through the mechanisms and steps needed to record that treatment correctly and accurately.
What Is a Purchase Return?
A purchase return is the process of sending goods or a product that were previously bought back to the seller. By its nature, a purchase return is recorded on the credit side of the journal entry. It may happen for a number of reasons, such as:
Defects in the product: the product may be damaged or may not work correctly.
The product not matching specification: the product may differ from the description stated in the invoice or the contract.
Excess quantity: the quantity supplied may be greater than the quantity ordered.
The accounting treatment of this transaction usually follows the method in use:
First: if the method in use is the periodic inventory method, the entry will be as follows:
Dr / Suppliers
Cr / Purchase returnsSecond: if the method in use is the perpetual inventory method, the entry will be as follows:
Dr / Suppliers
Cr / InventoryWhat Is the Purchase Issue Cost?
The purchase issue cost is the value deducted from inventory when the returned goods are taken out of it.
In the Nama system, issue cost is calculated using the average cost method, which means the cost of the goods issued is calculated on the basis of the average cost of all the units held in inventory.
Example:
If a company bought 3 units of a product at different prices (100 pounds, 200 pounds and 300 pounds), the average cost per unit is 200 pounds (600 / 3 = 200).
When one unit of this product is returned, the issue cost will be 200 pounds, regardless of the original purchase price of the unit being returned.
It is important to understand that:
The method used to calculate issue cost (in this case, average cost) does not change when goods are issued for any purpose, whether that is a sale, a return or anything else.
The Relationship Between the Value of a Purchase Return and the Issue Cost
The value of a purchase return does not always match the issue cost. For example, an item may be bought at a price of 100 and then returned at the same price. The issue cost, however — which represents the actual cost of the item when it leaves inventory — may differ from the original purchase price.
Issue cost is normally calculated using the average cost method. This means that issue cost is determined by dividing the total cost of all units in inventory by the number of units. So even if an item was bought at a particular price, its issue cost may differ because the other purchase prices for the same units have changed.
The difference between the value of a purchase return and the issue cost can cause problems with the accuracy of inventory accounts. For example, if a product is returned at a value of 100 and the return is processed at a value of 70, there will be a debit balance of 30 in the purchase return difference account.
The user should follow these steps in the Nama system:
Create a new accounting-side account for “Purchase return difference”
Direct the difference in the value of the return to the “Purchase return difference” account
Note that, following the previous example, if the return is at a value lower than the value at which the goods were issued, the user will set the debit side of the purchase return difference to the “Purchase returns” account, and the credit side of the purchase return difference to the “Purchase return difference” account.
In this case, the entry produced by the system on the return will appear as follows:
| Date | Description | Debit | Credit | Notes |
|---|---|---|---|---|
| X/X/2025 | Purchase returns | 70 | ||
| Purchase return difference | 30 | |||
| Inventory | 100 |
If, on the other hand, a product is returned at a value of 100 and the return is processed at a value of 120, there will be a credit balance of 20 in the purchase return difference account.
In this case the entry on the return will take this form:
| Date | Description | Debit | Credit | Notes |
|---|---|---|---|---|
| X/X/2025 | Purchase return | 120 | ||
| Purchase return difference | 20 | |||
| Inventory | 100 |
The Role of the “Purchase Return Difference” Account
The “Purchase return difference” account plays an important part in ensuring the accuracy of inventory accounts and in providing reliable information for business decisions.
The account is used to:
Separate the value of the purchase return from its issue cost: the value of the purchase return may equal the original purchase price, but the issue cost may differ because of the use of the average cost method.
Keep the purchase returns account accurate: the purchase returns account should always net to zero, which is achieved by matching the entry in purchase returns with the entry in the issue.
In short, the “Purchase return difference” account contributes to transparency and accuracy in managing inventory accounts, which in turn makes sound financial and commercial decisions possible.
What Is the Correct Way to Handle Purchase Return Differences?
To handle purchase return differences correctly, follow these steps:
Understand the cause of the difference: the difference between the value of the purchase return and the issue cost arises from the use of the average cost method to calculate the cost of taking goods out of the warehouse.
Create a separate account: the purchase return difference is directed to a separate account so that it can be tracked, usually called “Purchase return difference”.
The aim of this approach is to:
Separate the value of the purchase return from the issue cost.
Maintain the accuracy of inventory accounts.
Make purchase return differences easier to track and analyse.
FAQ
1- What is the common problem people run into when processing a purchase return?
The problem is that the value of the purchase return differs from the issue cost it generates in the system. For example, a product may be bought at a price of 100 and returned at the same price, yet the issue voucher may show a lower value such as 70 or 80.
2- Does the issue cost of a purchase return have to equal the value of the return?
No, not necessarily. The price of a product when it is returned may differ from its price at the time of purchase, particularly where prices have changed or the currency has been floated.
3- What happens to the difference between the value of the purchase return and the issue cost?
This difference is directed to a separate account so that it can be tracked. That account can be called “Purchase return difference” or any other suitable name.
4- Where is the “Purchase return difference” account placed?
It can be placed within the purchases account, or a separate account can be created for it.
5- Why does the “Purchase return difference” account matter?
This account helps to:
- Keep the purchase returns account at zero.
- Make it easier to answer questions such as:
- What is the value of purchase returns whose value has not been recovered from the supplier?
- What is the value of purchase return issues whose goods have been delivered to the supplier but for which the accrual has not been recorded?
- Provide accurate information on the cost of goods sold.
6- How is the purchase return difference directed in the Nama system?
This is done by specifying the “Purchase return difference” account in the accounting direction of the purchase return issue document, on either the debit or the credit side depending on the nature of the difference.