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Trading Account :: Net Purchases/Sales = Purchase/Sales Less Returns

Purchases account and Sales account provide information relating to purchase and sale of goods respectively. Purchase Returns a/c and Sales Returns a/c are used to collect the information relating to returns of purchased stock and sold stock respectively. Purchase Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned to the seller from whom the stock has been purchased.

Being a nominal account, this account is closed at the end of the accounting period.

Sales Returns a/c

Sales Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned by the buyers to whom the stock has been sold.

Being a nominal account, this account is closed at the end of the accounting period.

Gross Purchases and Gross Sales

The Purchase Returns a/c and the Sales Returns a/c provide information relating to returns only.

Since returns are recorded separately using these accounts, the Purchases a/c and Sales a/c give the information relating to the Gross Purchases and Gross Sales.

Need for information relating to Net Values

Along with the information relating to the returns and the gross values, the organisation needs the information relating to the net values i.e. the net purchases and net sales made by it.

There are two methods adopted for deriving the information relating to Net Purchases and Net Sales.

  • By Setting off the balance in the returns account with the related Ledger account.
  • By Transferring the balance in the returns accounts to Trading a/c and making adjustments thereon.

This information is generally derived at the end of the accounting period. However, it can be derived as and when needed, by deducting the balance in the returns account from the balance in the related account.

SET OFF : Setting off of ledger accounts is clubbing two accounts with opposite balances. In setting off ledger account balances, we close the account with the lower balance by transferring it to the account with a higher balance.

Finding Net Purchases

The Purchases a/c carries a debit balance and the Purchase Returns a/c carries a credit balance. At the end of the accounting period, the two accounts are set off i.e. the Purchase Returns a/c is closed by transfer to the Purchases a/c.

Transfer of a credit balance from one account to a second would result in the second account being credited and the first account being debited.

The balance remaining in the Purchases a/c would thus represent net purchases. At the end of the accounting period, this balance representing net purchases is transferred to the Trading a/c thus closing the Purchases account.

Journal/Ledger

The journal entry for recording the transfer would be
Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Amount
(Cr)
Purchase Returns a/c

To Purchases a/c

Dr 80,000
80,000
[For transferring the balance in the purchase returns account to the purchases account to derive the net purchases]
Purchase Returns a/c
DrCr
Particulars Amount Particulars Amount

To Purchases a/c

80,000
By –
By –

  80,000   80,000
Purchases a/c
DrCr
Particulars Amount Particulars Amount
To – To – – – By Purchase Returns a/c
By Trading a/c
80,000
5,00,000
  5,80,000   5,80,000

Finding Net Sales

The Sales a/c carries a credit balance and the Sales Returns a/c carries a debit balance. At the end of the accounting period, the two accounts are set off i.e. the Sales Returns a/c is closed by transfer to the Sales a/c.

Transfer of a debit balance from one account to a second would result in the second account being debited and the first account being credited.

The balance remaining in the Sales a/c would thus represent net sales. At the end of the accounting period, this balance representing net sales is transferred to the Trading a/c thus closing the Sales account.

Journal/Ledger

The journal entry for recording the transfer would be
Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Amount
(Cr)
Sales a/c

To Sales Returns a/c

Dr 72,500
72,500
[For transferring the balance in the sales returns

account to the sales account to derive the net sales]

Sales Returns a/c
DrCr
Particulars Amount Particulars Amount
To –
To –


By Sales a/c

72,500
  72,500   72,500
Sales a/c
DrCr
Particulars Amount Particulars Amount
To Sales Returns a/c
To Trading a/c
72,500
7,51,500
By – By – – –
  8,24,000   8,24,000

Information in Trading a/c

If this method is adopted for deriving the value of net purchases and sales, the Trading a/c would not display information relating to returns and would contain postings as To Purchases a/c on the debit side and the By Sales a/c on the credit side.
Trading a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock To Purchases To Wages To Octroi To Carriage Inwards

To Gross Profit

40,000 5,00,000 45,000 32,000 15,000

2,40,500

By Sales
Closing Stock
7,51,500
76,000
  8,27,500   8,27,500

Transferring balances in Purchases/Sales Returns a/c to Trading a/c

The Purchase Returns a/c and the Sales Returns a/c being nominal accounts are closed at the end of the accounting period by transfer to the Trading a/c (instead of to the Purchases a/c and Sales a/c respectively).

The Purchase Returns a/c carries a credit balance and the "Sales Returns a/c" carries a credit balance.

Journal

The journal entries for closing these accounts by transfer to the trading account would be
Journal in the books of M/s __ for the period from ____ to _____
Particulars Amount
(Dr)
Amount
(Cr)
Purchase Returns a/c

To Trading a/c

Dr 80,000
80,000
[For transferring the balance in the purchase returns account at the end of the accounting period to the trading account]
Trading a/c

To Sales Returns a/c

Dr 72,500
72,500
[For transferring the balance in the sales returns account at the end of the accounting period to the trading account]
Trading a/c with these journal entries posted:
Trading a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock To Purchases To Sales Returns To Wages To Octroi To Carriage Inwards

To Gross Profit

40,000 5,80,000 72,500 45,000 32,000 15,000

2,40,500

By Sales By Purchase Returns

Closing Stock

8,24,000 80,000

76,000

  9,80,000   9,80,000

We cannot derive the information relating to Net Purchases and Net Sales by just Posting the entries to the Trading a/c.

Since the information relating to Net Purchases and Net Sales is not revealed by just transferring the balances in the returns accounts to the Trading a/c we need to make adjustments to derive that information.

Posting (showing) an amount on the credit side of an account is an equivalent of deducting the amount from an item on the debit side.

Thus the Purchase Returns a/c balance instead of being shown on the credit side is deducted from Purchases a/c balance on the debit side of the Trading a/c, thereby giving the figure of Net Purchases in the Trading a/c itself.

Net Sales

Posting (showing) an amount on the debit side of an account is an equivalent of deducting the amount from an item on the credit side.

Thus, the Sales Returns a/c balance instead of being shown on the debit side would be deducted from Sales a/c on the credit side of the Trading a/c, thereby giving us the figure of Net Sales in the Trading account itself.

Deriving from the Trading a/c

Trading a/c
DrCr
Particulars Amount Amount Particulars Amount Amount
To Opening Stock
To Purchases

− Purchase Returns

To Wages To Octroi To Carriage Inwards

To Gross Profit


5,80,000

80,000

40,000 5,00,000 45,000 32,000 15,000

2,40,500

By Sales

− Sales Returns

Closing Stock
8,24,000

72,500

7,51,500

76,000

    8,27,500     8,27,500

Such an adjustment would not affect the figure of gross profit.


Category: Trading

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