3.1 Returns Inwards and Returns Outwards

In this chapter， the idea of different accounts for different movements of goods was introduced． The sales account and the returns inwards account deal with goods sold and goods returned by customers． The purchases account and the returns outwards account deal with goods purchased and goods returned to the supplier respectively． In our first look at the preparation of a trading account in Chapter 1， returns inwards and returns outwards were omitted． This was done deliberately， so that your first sight of statements of profit or loss would be as straightforward as possible．

Returns inwards ，alternatively called sales return． Referred to goods which had been previously sold to customers are now returned to the business． This could be for various reasons such as：

·You sent goods of the wrong size， the wrong color or the wrong model．

·The goods may have been damaged in transit．

·The goods are of poor quality．

Returns outwards ，alternatively called purchases return． Referred to goods which had been previously bought are returned by the business to suppliers．

Just as you may have done yourself， a large number of businesses return goods to their suppliers（returns outwards） and will have goods returned to them by their customers （returns inwards）． When the gross profit is calculated， these returns will have to be included in the calculations． Let's look at the first two lines of the trial balance in Exhibit 3.1 as you saw in Section 1.3 from Chapter 1：

Now， suppose that in the trial balance of G． John， rather than simply containing a sales account balance of ￡ 38，500 and a purchases account balance of ￡ 29，000 the balances included those for returns inwards and outwards， the balances in Exhibit 3.2 showing goods movement had been：

If we compare the two trial balances above， the gross profit amount will be exactly the same． Sales in Exhibit 3.1 were ￡ 38，500， while in Exhibit 3.2 the sales returns is deducted from sales as follows：

Purchases in Exhibit 3.1 were shown as ￡ 29，000 but in Exhibit 3.2 purchase returns will need to be deducted from purchases to ascertain the amount of goods retained by the business as shown below：

Comparing these two calculations reveals that they amount to the same thing so far as gross profit is concerned． Sales were ￡ 38，500 in the original example because returns inwards had already been deducted in arriving at the amount． In the amended version， returns inwards should be shown separately in the trial balance and then deducted on the face of the statement of profit or loss to get the correct figure for goods sold to customers and kept by them． In the new version， returns outwards should be deducted to get the correct figure of purchases kept by G． John． Both the returns accounts are included in the calculation of gross profit， which now becomes：

The gross profit is therefore unaffected and is the same as in Chapter 1：￡ 12，500.The trading account section of the statement of profit or loss will appear as shown in Exhibit 3.3：

You may have difficulty deciding whether sales returns should be deducted from sales or purchases figures and vice versa． The same applies to the purchase returns figure． The following illustration in Exhibit 3.4 shows that the returns are always deducted from the figure on the opposite side so forming an‘X’ in the trial balance：