The returns day books

The returns day books

Learning objectives

After you have studied this chapter, you should be able to: l make the appropriate entries relating to returns outwards in the Returns

Outwards Day Book l make the appropriate entries relating to returns inwards in the Returns Inwards Day Book l make the correct postings from the returns day books to the Purchases Ledger, Sales Ledger and General Ledger l explain the differences between a credit note and a debit note l describe how a debtor should use statements received from suppliers l enter up the accounts for credit card transactions l explain the need for internal checks on all sales and purchases invoices and

credit notes l describe what use may be made of factoring

Introduction

In this chapter, you’ll continue your look at the day books and ledgers by looking in more detail at the two day books that are used to record returns – the Returns Inwards Day Book (or Returns Inwards Journal) and the Returns Outwards Day Book (or Returns Outwards Journal). Having already looked at the sales side of transactions in Chapter 14 and the purchases side in Chapter 15, you’ll find that much of what you will learn in this chapter is very similar. In fact, postings from the returns day books to the personal accounts are the mirror image of the ones you learnt to make for sales and purchases.

16.1 Returns inwards and credit notes

You know that businesses allow customers to return goods they’ve bought. You’ve probably done so yourself at some time or other. Some retail businesses give every customer the right to do so within a few days of the sale and won’t ask why they are being returned. It is a means of assuring the customer that the seller believes that the goods are of good quality and will do what the customer wants. Whatever the rights of return granted by the seller, in the UK there are also legal rights of return that permit retail customers to return goods for a refund should the goods prove to have been unfit for the purpose that was intended.

Chapter 16 l The returns day books Businesses that deal with trade customers may operate a similar policy, but that would be

more unusual and would normally include a proviso that the customer had a justifiable and reasonable reason for returning the goods.

Activity

16.1 List as many reasons as you can think of why (a) retail customers and (b) trade customers may return goods to the seller.

Sometimes sellers may agree to keep the goods returned, even when they don’t normally do so, but won’t provide a full refund. Sometimes buyers will agree to keep goods they had wanted to return if the seller offers to refund some of the price they paid.

When the seller agrees to take back goods and refund the amount paid, or agrees to refund part or all of the amount the buyer paid, a document known as a credit note will be sent to the customer, showing the amount of the allowance given by the seller.

It is called a credit note because the customer’s account will be credited with the amount of the allowance, to show the reduction in the amount owed. Referring back to Exhibit 14.4, if D Poole returns two of the cases of McBrand Pears, a credit note like the one shown in Exhibit 16.1 would be issued by R Grant, the seller.

Exhibit 16.1

R Grant Higher Side

To: D Poole & Co

Preston PR1 2NL

45 Charles Street 8 September 20X9 Manchester M1 5ZN

Tel (01703) 33122 Fax (01703) 22331

CREDIT NOTE No 9/37

Per unit Total £

£ 2 cases McBrand Pears

25 50 Less 20% trade discount

To stop them being mistaken for invoices, credit notes are sometimes printed in red.

16.2 Returns inwards day book

The credit notes are listed in a Returns Inwards Day Book (or Returns Inwards Journal). This is then used for posting the items, as follows:

1 Sales Ledger: credit the amount of credit notes, one by one, to the accounts of the customers in the ledger.

2 General Ledger: at the end of the period the total of the Returns Inwards Day Book is posted to the debit of the returns inwards account.

Part 3 l Books of original entry

16.3 Example of a returns inwards day book

Exhibit 16.2 presents an example of a Returns Inwards Day Book showing the items to be posted to the Sales Ledger and the General Ledger followed by the entries in the ledger accounts.

Exhibit 16.2

Returns Inwards Day Book

(page 10)

Folio Amount 20X9

Note No

£ Sept

SL 12 40 ==

8 D Poole

SL 58 120 ==

17 A Brewster

SL 99 290 ==

19 C Vickers

SL 112 160 Transferred to Returns Inwards Account

29 M Nelson

GL 114 610

Sales Ledger

D Poole

8 Returns inwards RI 10 40

A Brewster

(page 58)

20X9

Folio £ Sept 17 Returns inwards

RI 10 120

C Vickers

(page 99)

20X9

Folio £ Sept 19 Returns inwards

RI 10 290

20X9

M Nelson

(page 112)

Folio £ Sept 29 Returns inwards

RI 10 160

General Ledger

(page 114) 20X9

Returns Inwards

Folio

Sept 30 Returns for the

The Returns Inwards Day Book is sometimes known as the Sales Returns Day Book, because it is goods that were sold that are being returned.

Chapter 16 l The returns day books

16.4 Returns outwards and debit notes

If the supplier agrees, goods bought previously may be returned. When this happens a debit note is sent by the customer to the supplier giving details of the goods and the reason for their

return. The credit note received from the supplier will simply be evidence of the supplier’s agreement, and the amounts involved. Also, an allowance might be given by the supplier for any faults in the goods. Here also, a debit note should be sent to the supplier. Referring back to Exhibit 16.1, Exhibit 16.3 shows an example of the debit note that Poole, the buyer, may have sent to Grant, the seller.

Exhibit 16.3

D Poole & Co 45 Charles Street

To: R Grant

Manchester M1 5ZN

Higher Side 7 September 20X9 Preston PR1 2NL

Tel (0161) 488 2142 Fax (0161) 488 2143

DEBIT NOTE No 9.22

Per Unit Total £

£ 2 cases McBrand Pears damaged in transit

25 50 Less 20% trade discount

Note the differences between this debit note and the credit note in Exhibit 16.1: the names and addresses have swapped places and the document is described as ‘Debit Note No 9.22’ rather than ‘Credit Note No 9/37’, because Poole uses its own debit note numbering sequence. Also, the dates are different. In this case, it is assumed that Poole raised the debit note on

7 September and sent it and the goods to Grant. Grant received the goods on 8 September and

raised the credit note on that date. Finally, the reason for the return of the goods is given.

16.5 Returns outwards day book

The debit notes are listed in a Returns Outwards Day Book (or Returns Outwards Journal). This is then used for posting the items, as follows:

1 Purchases Ledger: debit the amounts of debit notes, one by one, to the personal accounts of the suppliers in the ledger.

2 General Ledger: at the end of the period, the total of the Returns Outwards Day Book is posted to the credit of the returns outwards account.

Part 3 l Books of original entry

16.6 Example of a returns outwards day book

Exhibit 16.4 presents an example of a Returns Outwards Day Book showing the items to be posted to the Purchases Ledger and the General Ledger followed by the entries in the Ledger accounts.

Exhibit 16.4

Returns Outwards Day Book

(page 7)

Folio Amount 20X9

Note No

£ Sept

7 R Grant 9.22 PL 29 40 ==

9.23 PL 46 240 ==

16 B Rose

9.24 PL 55 30 ==

28 C Blake

30 S Saunders 9.25 PL 87 360 Transferred to Returns Outwards Account

GL 116 670

Purchases Ledger

(page 29) 20X9

R Grant

Folio

Sept 7 Returns outwards

RO 7

(page 46) 20X9

B Rose

Folio

Sept 16 Returns outwards

RO 7

(page 55) 20X9

C Blake

Folio

Sept 28 Returns outwards

RO 7

30 S Saunders

(page 87) 20X9

Folio

Sept 30 Returns outwards

RO 7

General Ledger

Returns Outwards

(page 116)

20X9

Folio £ Sept 30 Returns for the

RO 7 670

month

The Returns Outwards Day Book is sometimes known as the Purchases Returns Day Book, because it is goods that were purchased that are being returned.

16.7 Double entry and returns

Exhibit 16.5 shows how the entries are made for returns inwards and returns outwards.

Chapter 16 l The returns day books

Exhibit 16.5 Posting returns inwards and returns outwards

16.8 Statements

At the end of each month, a statement should be sent to each debtor who owes money on the last day of the month. It is really a copy of the debtor’s account in the seller’s books. It should show:

1 the amount owing at start of month;

2 the amount of each sales invoice sent to the debtor during the month;

3 credit notes sent to the debtor in the month;

4 cash and cheques received from the debtor during the month; and, finally,

5 the amount due from the debtor at the end of the month.

Exhibit 16.6 on the next page shows an example of a statement. Debtors will check to see if the account in their accounting records agrees with the statement. If the statement shows they owe £520, but their records show a different amount due, they will investigate the difference in order to see whether either the statement or their records is incor- rect. If they discover there has been an error in their books, they will correct it. If they find that there is an error in the statement, they will contact the seller.

Activity

16.2 What sort of things could result in the statement and the account held in the books of the debtor showing different balances?

Apart from enabling debtors to check the amount due, the statement also acts as a reminder to debtors that they owe the seller money, and shows the date by which they should make

Part 3 l Books of original entry

Exhibit 16.6

STATEMENT OF ACCOUNT R GRANT

Higher Side Preston PR1 2NL

Tel (01703) 33122 Fax (01703) 22331

Accounts Dept D Poole & Co 45 Charles Street Manchester M1 5ZN

Date Details

Credit Balance 20X9

Debit

£ £ Sept

1 Balance b/d 880 Sept

8 Returns 9/37 40 1,400 Sept 25 Bank

880 520 Sept 30 Balance owing c /d

520 All accounts due and payable within 1 month

payment. Sellers who are contacted by a debtor querying a statement will benefit from having any errors identified in their records.

16.9 Sales and purchases via credit cards

Various banks, building societies and other financial institutions issue credit cards to their cus- tomers. The most common examples are Visa and MasterCard. The holder of the credit card purchases goods or services without giving cash or cheques, but simply signs a credit card voucher. The customer is given a copy and the other copy is filed by the seller. Such sales are very

rarely sales to anyone other than the general public. The seller is paid later by the credit card company for all the credit card transactions in the period since the last payment made to the seller. This payment is subject to a deduction of com- mission by the credit card company.

Once a month, the customer pays the credit card company for all of the payments charged to the credit card during the previous month. As far as the purchaser is concerned, he has seen goods and has received them (or received the service he requested). In the eyes of the customer, they were paid for at the time of purchase and

a loan has been granted by the credit card company in order to do so. Once the customer has the goods, or has received the appropriate services, the customer does not become a debtor needing an entry in a Sales Ledger and so (as mentioned in Chapter 14) similarly to a cash sale, no ledger account is maintained for the customer. All the selling com- pany is then interested in, from a recording point of view, is collecting the money from the credit card company.

Chapter 16 l The returns day books The double entry needed is:

Sale of items via credit cards: Dr: Credit card company Cr: Sales

Receipt of money from credit card company:

Dr: Bank Cr: Credit card company

Commission charged by credit card company:

Dr: Selling expenses Cr: Credit card company

Note: the commission is not a deduction from the selling price. It is treated in the same way as cash discounts. That is, it is a selling expense and is entered in the profit and loss part of the Trading and Profit and Loss Account.

16.10 Internal check

When sales invoices are prepared, they should be very carefully checked. A system is usually set up so that each stage of the preparation of an invoice is checked by someone other than the per- son whose job is to send out the invoice.

Activity

16.3 What sort of things could occur that make checking of all invoices, both those for sales and those for purchases, something that all businesses should do?

A system should, therefore, be set up whereby invoices are checked at each stage by someone other than the person who sends out the invoices or is responsible for paying them. For purchase invoices, checks should be established, such as using a rubber stamp to stamp each incoming invoice with a mini form with spaces for ticks as each stage of the check on them is completed. The spaces in the stamp will be filled in by the people responsible for making each of the checks on the purchase invoices received, e.g.:

l one person certifying that the goods were actually received; l

a second person certifying that the goods were ordered; l

a third person certifying that the prices and calculations on the invoice are correct, and in accordance with the order originally placed and agreed; l

a fourth person certifying that the goods are in good condition and suitable for the purpose for which ordered.

check may be in the hands of only one person other than the person who will pay the invoice.

Naturally, in a small business, simply because the office staff might be quite small, this cross-

A similar sort of check will be made in respect of sales invoices being sent out and on credit notes, both those being sent out and those being received.

16.11 Factoring

You’ve already learnt that one of the problems that many businesses face is the time taken by debtors to pay their accounts. Few businesses have so much cash available to them that they do not mind how long debtors takes to pay. It is a rather surprising fact that a lot of businesses which fail do so, not because the business is not making a profit, but because it has run out of cash funds. Once that happens, confidence in the business evaporates, and the business then finds that very few people will supply it with goods. It also cannot pay its employees. Closure of the business then happens fairly quickly in many cases.

Part 3 l Books of original entry As mentioned in Chapter 8, in the case of debtors, the cash flow problem may be alleviated by

using the services of a financial intermediary called a factor . Factoring is a financial service designed to improve the cash flow of healthy, growing com- panies, enabling them to make better use of management time and the money tied up in trade credit to customers.

In essence, factors provide their clients with three closely integrated services covering sales accounting and collection, credit management which can include protection against bad debts, and the availability of finance against sales invoices.

16.12 E&OE

On some invoices and other documents you will see ‘E&OE’ printed at the bottom. This abbre- viation stands for ‘Errors and Omissions Excepted’. Basically, this is a warning that there may possibly be errors or omissions which could mean that the figures shown could be incorrect, and that the recipient should check carefully the figures before taking any action concerning them.

Learning outcomes

You should now have learnt:

1 That ‘Returns Inwards Day Book’, ‘Returns Inwards Journal’, ‘Sales Returns Journal’ and ‘Sales Returns Day Book’ are different names for the same book.

2 That ‘Returns Outwards Day Book’, ‘Returns Outwards Journal’, ‘Purchases Returns Journal’ and ‘Purchases Returns Day Book’ are different names for the same book.

3 That goods returned by customers are all entered in a Returns Inwards Day Book.

4 That the Returns Inwards Day Book is used to post each item to the credit of the personal account of the customer in the Sales Ledger.

5 That the total of the Returns Inwards Day Book is debited at the end of the period to the returns inwards account in the General Ledger.

6 That goods returned to suppliers are all entered in a Returns Outwards Day Book.

7 What the difference is between a credit note and a debit note.

8 That the Returns Outwards Day Book is used to debit the personal account of each supplier in the Purchases Ledger.

9 That the total of the Returns Outwards Day Book is credited at the end of the period to the returns outwards account in the General Ledger.

10 How to make the appropriate entries relating to returns in the Returns Inwards and Returns Outwards day books and make the correct postings from them to the Purchases Ledger, Sales Ledger and General Ledger.

11 That the process of making entries for returns in the books of purchasers and sellers is the mirror image of those made in their books for purchases and sales.

Chapter 16 l The returns day books

12 That statements are used by debtors to check the entries made in their books.

13 Of a range of causes for differences that can arise between statements and the seller’s account in the debtor’s Purchases Ledger and that such differences may not all be the result of an error.

14 How credit card transactions are recorded in the books and how commission charged to sellers by the credit card companies is treated in the Trading and Profit and Loss Account.

15 Why an effective system of invoice checking should be used by all businesses.

16 Why factoring is an attractive option for some businesses.

Answers to activities

16.1 In either case, the reasons why goods may be returned include: l they were of the wrong type (e.g. the wrong model number of replacement remote control for

a TV) l the item purchased was one that was already owned by the customer (e.g. a CD) l they were the wrong colour (e.g. paint doesn’t match the existing colour) l they were the wrong size (e.g. a pair of trousers was too tight) l they were faulty (e.g. a computer kept crashing) l

a customer bought more than was needed (newsagents returning unsold newspapers)

l a customer changed her mind (e.g. hire purchase agreement on a DVD player) l

a customer saw the same goods elsewhere at a cheaper price l

a customer found the goods too difficult to use (e.g. the instructions for setting up and operat- ing a video recorder were too complicated) l (for trade customers) a customer had returned a faulty item to them and they were now returning it to their supplier l items received damaged by the customer (e.g. fruit delivered to a supermarket) l the seller had asked all customers to return a specific item (e.g. when an electrical good or a

child’s toy is found to be dangerous).

16.2 Differences could be due to a number of things having occurred, including the following: l

a purchase had been omitted from the books of either the seller or the debtor l

a purchase had been incorrectly entered in the books of either the seller or the debtor

l a purchase had been made at the end of the month but only entered in the books of either the seller or the debtor in the following month l goods returned had been entered in the books of the seller but not in the books of the debtor

l goods returned had been incorrectly entered in the books of either the seller or the debtor

l the debtor had entered goods as having been returned in the books when, in fact, the goods were not returned to the seller l

a purchase had been recorded in the books of the seller in the debtor’s account when it should have been entered in the account of another customer l

a purchase had been recorded in the books of the debtor in the seller’s account when it should have been entered in the account of another seller l

a payment made to the supplier and entered in the books of the debtor had not yet been received by the seller l goods had been despatched by the seller and entered in the books of the seller but had not yet been received by the debtor.

16.3 If this were not done then it would be possible for someone inside a business to send out an invoice at a price less than the true price. Any difference could then be split between that person and the outside business. For example, if an invoice was sent to Ivor Twister & Co for £2,000 but the invoice clerk made it out deliberately for £200 then, if there was no cross-check, the difference of £1,800 could be split between the invoice clerk and Ivor Twister & Company.

Part 3 l Books of original entry Similarly, outside businesses could send invoices for goods which were never received by the

business. This might be in collaboration with an employee within the business, but there are busi- nesses sending false invoices which rely on the businesses receiving them being inefficient and paying for items never received. There have been cases of businesses sending invoices for such items as advertisements which have never been published. The cashier of the business receiving the invoice, if the business is an inefficient one, might possibly think that someone in the business had authorised the advertisements and would pay the bill. Besides these there are, of course, gen- uine errors that an invoice checking system helps to avoid.

Review questions

16.1 You are to enter up the Purchases Day Book and the Returns Outwards Day Book from the following details, then to post the items to the relevant accounts in the Purchases Ledger and to show the transfers to the General Ledger at the end of the month.

20X7 May

1 Credit purchase from F Bean £324. ==

4 Credit purchases from the following: A Clerk £216; B Lock £322; F Turner £64; G Rill £130.

== 7 Goods returned by us to the following: F Bean £56; A Clerk £28. ==

10 Credit purchase from B Lock £140. ==

18 Credit purchases from the following: J Top £230; I Gray £310; F Low £405; P Able £180. ==

25 Goods returned by us to the following: I Gray £140; B Lock £34. ==

31 Credit purchases from: F Turner £174; T Burns £230. 16.2A Enter up the Sales Day Book and the Returns Inwards Day Book from the following

details. Then post to the customers’ accounts and show the transfers to the General Ledger. 20X8

June 1 Credit sales to: B Dock £240; M Ryan £126; G Soul £94; F Trip £107. ==

6 Credit sales to: P Coates £182; L Job £203; T Mann £99. ==

10 Goods returned to us by: B Dock £19; F Trip £32. ==

20 Credit sales to B Uphill £1,790. ==

24 Goods returned to us by L Job £16. ==

30 Credit sales to T Kane £302.

16.3 You are to enter up the sales, purchases, returns inwards and returns outwards day books from the following details, then to post the items to the relevant accounts in the sales and pur- chase ledgers. The total of the day books are then to be transferred to the accounts in the General

Ledger. 20X9

May 1 Credit sales: T Thompson £56; L Rodriguez £148; K Barton £145. ==

3 Credit purchases: P Potter £144; H Harris £25; B Spencer £76. ==

7 Credit sales: K Kelly £89; N Mendes £78; N Lee £257. ==

9 Credit purchases: B Perkins £24; H Harris £58; H Miles £123. ==

11 Goods returned by us to: P Potter £12; B Spencer £22. ==

14 Goods returned to us by: T Thompson £5; K Barton £11; K Kelly £14. ==

17 Credit purchases: H Harris £54; B Perkins £65; L Nixon £75. ==

20 Goods returned by us to B Spencer £14. ==

24 Credit sales: K Mohammed £57; K Kelly £65; O Green £112. ==

28 Goods returned to us by N Mendes £24. ==

31 Credit sales: N Lee £55.

Chapter 16 l The returns day books

16.4A You are to enter the following items in the books, post to personal accounts, and show the transfers to the General Ledger.

20X9 July

1 Credit purchases from: K Hill £380; M Norman £500; N Senior £106. ==

3 Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356. ==

5 Credit purchases from: R Morton £200; J Cook £180; D Edwards £410; C Davies £66.

== 8 Credit sales to: A Green £307; H George £250; J Ferguson £185. ==

12 Returns outwards to: M Norman £30; N Senior £16. ==

14 Returns inwards from: E Phillips £18; F Thompson £22. ==

20 Credit sales to: E Phillips £188; F Powell £310; E Lee £420. ==

24 Credit purchases from: C Ferguson £550; K Ennevor £900. ==

31 Returns inwards from: E Phillips £27; E Rigby £30. ==

31 Returns outwards to: J Cook £13; C Davies £11.

You can find a range of additional self-test questions, as well as material to help you with your studies, on the website that accompanies this book at www.pearsoned.co.uk/wood

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