Journal Entry for Goods Returned at Trade Discount in Accounting

Understanding the proper journal entries for returned goods that were originally purchased at a trade discount is crucial for maintaining accurate financial records. This article aims to provide a comprehensive explanation of the correct entries and the key concepts involved.

Introduction to Trade Discount and Journal Entries

A trade discount is a reduction in the list price of goods sold to retailers or wholesalers. It is not recorded in the journal entry but is directly deducted from the invoice. This article will cover the steps to make the necessary entries when goods purchased at a trade discount are returned.

Purchase Journal Entry at Trade Discount

Let's consider a situation where goods worth Rs. 40,000 are purchased with a 10% trade discount, making the net purchase price Rs. 36,000 (Rs. 40,000 - 10% of Rs. 40,000).

Journal Entry:

``` Purchase A/C Dr. 36,000 To Cash/Bank A/C 36,000 ```

Explanation:

The list price of the goods was Rs. 40,000. The trade discount was 10%, so the discounted price paid was Rs. 36,000 (Rs. 40,000 - 10% of Rs. 40,000).

Journal Entry for Returned Goods

Now, if goods worth Rs. 1,000 are returned, the correct entry involves debiting the Purchase Returns and Allowances Account and crediting the Purchases Account by the same amount.

Journal Entry:

``` Purchases Returns and Allowances A/C Dr. 1,000 To Purchases A/C 1,000 ```

Explanation:

The returned goods were priced at Rs. 1,000, but their list price could be different. This entry reflects that the returned goods amounting to Rs. 1,000 are being recorded in the financial accounts. The Purchases Account is credited to reverse the original purchase entry for these goods.

Special Cases - List Price vs. Purchase Price

It's important to clarify whether the returned goods are listed at the original list price or the purchase price after the trade discount.

If the Rs. 1,000 is a List Price:

``` Creditors A/C Dr. 900 To Purchase Returns A/C 900 ```

Explanation:

The trade discount was already considered in the purchase entry, hence only a portion (90%) of the Rs. 1,000 needs to be returned.

If the Rs. 1,000 is a Purchase Price:

``` Creditors A/C Dr. 1,000 To Purchase Returns A/C 1,000 ```

Explanation:

No deduction for trade discount is necessary as the entire amount of Rs. 1,000 is being returned.

Conclusion

Proper handling of returned goods in the context of trade discounts involves careful calculation and accurate accounting entries. Understanding the difference between the list price and the purchase price ensures that financial records remain accurate and reflective of the actual transactions.

For further assistance or any specific accounting queries, consulting with a professional accountant is recommended.