Purchase and Sales Returns

Prerequisites: Module 13 — Credit Purchases and Sales

Learning Objectives

By the end of this module, you will be able to:

• Explain when and why purchase returns and sales returns occur
• Issue a Debit Note for purchase returns
• Issue a Credit Note for sales returns
• Calculate the GST impact of returns
• Record returns correctly in Tally

Returns at a Glance

PURCHASE RETURN (goods go back to supplier)
  Supplier sends → Sunrise Retail inspects → Defects found → Debit Note issued
  Entry: Dr Supplier  |  Cr Purchase Return + Cr GST Input
  Tally: Alt+F9 (Debit Note)

SALES RETURN (goods come back from customer)
  Customer sold → Customer complains → Goods returned → Credit Note issued
  Entry: Dr Sales Return + Dr GST Output  |  Cr Customer
  Tally: Alt+F8 (Credit Note)

Why Returns Happen

In real-world trading, not every shipment goes perfectly. Returns occur due to:

• Damaged goods — items broken during transit
• Wrong items — supplier sent a different model
• Quality defects — items fail quality check
• Excess supply — more units sent than ordered
• Customer dissatisfaction — items don't match specifications

When goods are returned, the original sale or purchase must be reversed — partially or fully. And since GST was charged on the original transaction, the return must also reverse the GST.

Purchase Return — Debit Note

When Sunrise Retail returns goods to a supplier, the supplier's liability to Sunrise Retail reduces. Sunrise Retail:

• Returns the goods (stock reduces)
• Claims back the amount payable (creditor balance reduces)
• Reverses the GST Input Credit claimed (IGST/CGST/SGST input reduces)

The document Sunrise Retail issues to the supplier is called a Debit Note — because Sunrise Retail debits the supplier's account (reduces what it owes them).

Journal Entry — Purchase Return:

Dr  Supplier's A/c (reduce what we owe)
    Cr  Purchase Return A/c (reduce purchase cost)
    Cr  GST Input Credit A/c (reverse the input credit)

In Tally: use Purchase Return Voucher (also called Debit Note)

Gateway → Accounting Vouchers → Alt+F9 (Purchase Return / Debit Note)

Sales Return — Credit Note

When a customer returns goods to Sunrise Retail, the customer's debt to Sunrise Retail reduces. Sunrise Retail:

• Accepts the goods back (stock increases)
• Reduces what the customer owes (debtor balance reduces)
• Reverses the GST Output charged (reduces GST payable)

The document Sunrise Retail issues to the customer is called a Credit Note — because Sunrise Retail credits the customer's account (reduces what they owe).

Journal Entry — Sales Return:

Dr  Sales Return A/c (reduce sales)
Dr  GST Output A/c (reverse output tax)
    Cr  Customer's A/c (reduce what they owe us)

In Tally: use Sales Return Voucher (also called Credit Note)

Gateway → Accounting Vouchers → Alt+F8 (Sales Return / Credit Note)

GST on Returns — Important Rule

GST is calculated on the original invoice value, not on any negotiated post-return price. The return document should reference the original invoice and apply the same GST rate.

Under GST law, a Credit/Debit Note must be issued:

• Within the time of filing the annual return for the financial year (or before September 30 of the following year, whichever is earlier)
• Must quote the original invoice number and date
• Supplier must reduce Output GST; buyer must reduce Input Credit

Sunrise Retail — Case Study Application

💼 Sunrise Retail Pvt Ltd — April 2025 Returns

Scenario 1: Purchase Return to TechWorld (Apr 22)

5 phones from the April 5 batch (100 phones) were found defective — screens cracked on arrival. Sunrise Retail returns them to TechWorld.

Original purchase: @ ₹12,000 per phone, IGST 18%

Return calculations:

• Return value: 5 × ₹12,000 = ₹60,000
• IGST @ 18% to reverse: ₹10,800
• Debit Note Total: ₹70,800

Debit Note — DR-2025-001:

TechWorld's balance reduces from ₹10,96,000 (after Apr 20 payment) to ₹10,25,200.

Stock impact: Samsung Mobile Phones reduces by 5 → 100 − 5 = 95 Nos (was 100 after sales)

Wait — let's track correctly:

• Opening: 50 Nos
• Purchased Apr 5: +100 Nos → 150 Nos
• Sold Apr 10 (Digital Hub): −30 Nos → 120 Nos
• Sold Apr 12 (CloudStore): −20 Nos → 100 Nos
• Return to TechWorld Apr 22: −5 Nos → 95 Nos

In Tally (Alt+F9 — Purchase Return/Debit Note):

Gateway → Accounting Vouchers → Alt+F9 (Debit Note)
Date: 22-Apr-2025
Debit Note No: DR-2025-001
Against Invoice: TW/2025-26/001 (original purchase invoice)

Scenario 2: Sales Return from Digital Hub (Apr 24)

Digital Hub returns 2 phones from the April 10 batch — they claim customers complained about the fingerprint sensor.

Original sale: 30 phones @ ₹16,000 each, CGST+SGST 9% each.

Return calculations:

• Return value: 2 × ₹16,000 = ₹32,000
• CGST @ 9% to reverse: ₹2,880
• SGST @ 9% to reverse: ₹2,880
• Credit Note Total: ₹37,760

Credit Note — CN-2025-001:

Digital Hub's balance (which was ₹0 after April 18 payment) now shows a credit balance of ₹37,760 — Sunrise Retail owes Digital Hub this refund.

Alternatively: The credit note can be adjusted against Digital Hub's next invoice.

Stock impact: 2 phones returned → +2 Nos → 95 + 2 = 97 Nos

In Tally (Alt+F8 — Credit Note):

Gateway → Accounting Vouchers → Alt+F8 (Credit Note)
Date: 24-Apr-2025
Credit Note No: CN-2025-001
Against Invoice: SR/2025-26/001 (original sales invoice)

Updated Stock Position After All April Movements

Closing Stock Value: 97 × ₹12,000 = ₹11,64,000

Impact on GST Reports

After the returns, Sunrise Retail's revised GST position for April:

IGST:

• Input Credit (Purchase Apr 5): ₹2,16,000
• Less: Reversed (Purchase Return Apr 22): −₹10,800
• Net IGST Input: ₹2,05,200
• Output (CloudStore sale): ₹59,400
• Net IGST Credit: ₹1,45,800

CGST:

• Input Credit (Rent): ₹2,700
• Output (Digital Hub sale): ₹43,200
• Less: Reversed (Sales Return): −₹2,880
• Net Output: ₹40,320
• Net CGST Payable: ₹37,620

SGST: Same as CGST = ₹37,620 payable

Practice Exercise

Exercise 1: Sunrise Retail sells 10 Dell laptops to Tech Park at ₹42,000 each on May 15 (CGST+SGST 9%). Tech Park returns 3 laptops on May 25 claiming battery issues.

Calculate the Credit Note amount and write the journal entry.

Exercise 2: Sunrise Retail receives only 90 phones (instead of 100 ordered) from Galaxy Electronics in May, but the invoice is for 100. They issue a debit note for the shortage.

Original purchase: 100 phones @ ₹13,500 each, IGST 18%. Debit Note for shortage: 10 phones.

Write the Debit Note entry.

Key Terms

Module Summary

• Purchase returns reduce stock, reduce creditor balance, and reverse GST input credit
• Sales returns increase stock, reduce debtor balance, and reverse GST output
• Debit Note = issued for purchase return; Credit Note = issued for sales return
• In Tally: Purchase Return = Alt+F9 (Debit Note); Sales Return = Alt+F8 (Credit Note)
• Always reference the original invoice number on the return document — required for GST compliance
• After all April returns, Sunrise Retail's closing stock = 97 Samsung phones @ ₹11,64,000

Quick Quiz

1. Sunrise Retail returns 5 phones to TechWorld. The document Sunrise Retail issues is:
   • a) Credit Note
   • b) Debit Note
   • c) Invoice
   • d) Receipt

2. In a purchase return entry, the IGST Input Credit account is:
   • a) Debited — IGST increases
   • b) Credited — IGST input is reversed/reduced
   • c) Not affected — returns don't impact GST
   • d) Moved to IGST Output

3. In Tally, the Sales Return voucher is accessed via:
   • a) Alt+F9
   • b) Alt+F8
   • c) F8
   • d) Ctrl+F8

4. After Digital Hub returns 2 phones (₹37,760 credit note), and Digital Hub had a zero balance, their account now shows:
   • a) Debit balance of ₹37,760
   • b) Credit balance of ₹37,760
   • c) Zero balance — return cancels out
   • d) Debit balance — they still owe us

Next: Module 15 — Godown and Stock Category — Set up Sunrise Retail's second location (HITEC City Showroom), transfer phones between godowns using Stock Journal, and organise inventory by brand category.