PURCHASE RETURN PROCESS (STUDY OBJECTIVE 3)
Occasionally, the company may reject goods received and initiate the purchase return process. This may occur for a variety of reasons, including the following:
- Goods received are unacceptable due to these situations:
- Quantity or quality discrepancies
- Damage or defects
- Errors in the type of goods delivered or ordered
- Discrepancies in the terms of the purchase
- Timing issues
- Changes in the company's needs regarding future sales or production.
The unacceptable-goods circumstances noted in the first item listed are typically detected immediately, since goods are inspected upon receipt. Sometimes, however, unacceptable goods may be discovered at a later date, especially in the case of defective goods, quality discrepancies, and purchase terms discrepancies. Changes in company needs, the second item, may occur at any time, as the company may have unforeseen changes in its business activities. Regardless of the reason for rejecting a purchase or the timing of the return, a company must have specific procedures in place for handling its returns to a vendor. Exhibit 9-9 presents a business process map of the activities related to purchase return transactions. Exhibit 9-10 is a document flowchart showing the records used in the purchase return process, and Exhibit 9-11 shows a data flow diagram of purchase returns. These exhibits depict a return process whereby the items being returned had been received and accepted at an earlier time, rather than being rejected immediately upon receipt.
Exhibit 9-9 Purchase Return Process Map
Exhibit 9-10 Document Flowchart of the Purchase Return Processes
Exhibit 9-11 Purchase Return Processes Data Flow Diagram
Once rejected goods are identified, management approval must be obtained in order to formally make the decision to return the purchase. A debit memo should then be prepared. A debit memo is the document that identifies the items being returned, along with relevant information regarding vendor, quantity, and price. This form should be prepared by the accounts payable department on the basis of information from the related purchasing records, such as the PO, receiving report, and/or invoice. Exhibit 9-12 shows the processing of a purchase return in Microsoft Dynamics®.
After the debit memo is prepared, the goods can be physically returned to the vendor. At that point, the company should prepare a record of the return shipment, similar to the procedures described in Chapter 8 for shipments related to the sales process. It is a good practice to keep a record of all shipping activity, whether it is related to sales or purchase return transactions. It is also necessary to update inventory records so that the returned goods are no longer recorded as company assets. (Note that the accounts affected will depend on the type of inventory system used by the company, either perpetual or periodic.)
Exhibit 9-12 Entering Purchase Returns in Microsoft Dynamics®
Occasionally, communications with the vendor regarding purchase returns indicate that there is no need to physically return the goods. In the case of defective goods, for example, a vendor may wish to avoid the costs of shipping the items and may therefore instruct the company to dispose of the goods rather than return them. When this happens, the company may need to implement additional controls to be sure that the disposal is not overlooked in the accounting records. Because there will be no shipping report for this item, company personnel may need to make an extra effort to be sure the debit memo is properly prepared and recorded.
Finally, the company will receive a refund or credit from the vendor for the returned (or disposed) goods. If a cash refund is received, the cash receipts procedures described in Chapter 8 should be implemented. If a credit is received, accounts payable records must be adjusted to reflect a reduction in the amount owed to the vendor.