Record credit purchases, credit sales and returns inwards and outwards using double entry

What this dot point is asking

SEAB wants you to record trading transactions with double entry: credit purchases and sales, the returns that go with them, and related items such as carriage. The central insight is that the business keeps separate Purchases, Sales, Returns inwards and Returns outwards accounts so the income statement can show each total clearly, rather than netting them in one account.

The answer

Credit purchases and sales

Purchases records goods bought for resale; Sales records goods sold. The customer becomes a trade receivable (owes the business); the supplier becomes a trade payable (the business owes them).

Returns

Goods sometimes go back. They are recorded in their own accounts, not by reversing the original entry:

Returns inwards reduce sales; returns outwards reduce purchases. Keeping them separate lets the income statement show net sales and net purchases.

Carriage

Carriage is the cost of transporting goods:

• Carriage inwards - cost of bringing purchases in. It is added to the cost of goods (treated with purchases).
• Carriage outwards - cost of delivering goods to customers. It is a selling expense.

Both are debited (an expense or cost) and the asset paid from is credited.

Examples in context

Example 1. A credit sale, a return, then payment. A trader sells \2,000$on credit (Debit customer, Credit Sales), the customer returns$\$300$ (Debit Returns inwards, Credit customer), then pays the \1,700$ balance by cheque (Debit Bank, Credit customer). The customer's account clears to nil, and the Returns inwards account keeps a record of the goods sent back for the income statement.

Example 2. Why carriage is split. A shop pays \100$to bring stock in and$\$150$ to deliver goods to customers. Carriage inwards (\100$) is added to the cost of buying goods, raising cost of sales; carriage outwards ($\$150$) is a separate selling expense. Splitting them lets the gross profit reflect only the cost of getting goods ready to sell.

Try this

Q1. State the double entry for selling goods \1,000$ on credit to Lim. [2 marks]

• Cue. Debit Lim (trade receivable) \1,000$; Credit Sales$\$1\,000$.

Q2. A customer returns \250$ of goods bought on credit. Give the double entry. [2 marks]

• Cue. Debit Returns inwards \250$; Credit the customer$\$250$.

Q3. Explain how carriage inwards and carriage outwards are treated differently. [3 marks]

• Cue. Carriage inwards is added to the cost of goods (part of cost of sales); carriage outwards is a selling expense shown separately in the income statement.