A purchase return transaction is when the buyer of merchandise, inventory, fixed assets, or other items sends these goods back to the seller. Excessive purchase returns can interfere with the profitability of a business, so they should be closely monitored. There are a number of reasons for purchase returns, such as:
- The buyer initially acquired an excessive quantity, and wants to return the remainder
- The buyer acquired the wrong goods
- The seller sent the wrong goods
- The goods have proven to be inadequate in some way
The seller can legitimately charge a restocking fee to the buyer in exchange for agreeing to take back goods (unless the seller originally shipped the wrong goods to the buyer). The amount of a restocking fee is generally in the vicinity of 15% of the price the buyer paid for the goods being returned. This fee is typically not charged if a company offers free returns within a certain number of days of the purchase date.
A purchase return is usually authorized under a return merchandise authorization (RMA) that is issued to the buyer by the seller. When the buyer packages the goods for return to the seller, it marks the RMA number on the outside of the package, which the seller's receiving department matches against its list of authorized and outstanding RMA numbers before accepting the receipt.
The seller has several options for compensating the buyer for any returned goods, which include:
- A credit against future purchases
- A credit memo that the buyer can apply against its next payment to the seller
- An outright cash payment to the buyer
When the buyer records a purchase return, it can be either as a credit to its inventory account (if there are few such transactions) or to a purchase returns account (if management wants to segregate this information for further analysis). The offsetting debit is to the accounts payable account.