Discounts & returns · Level: Exam
Journal entry: Goods returned to a supplier
Faulty goods go back and we get a credit note. The purchase entry is reversed in part, including the input VAT.
Worked example
We return damaged goods worth £1,500.00 plus 20% VAT to Smith Ltd and receive a credit note.
Correct journal entry
Trade payables £1,800.00 / Purchases £1,500.00, Input VAT £300.00
Debit
Trade payables£1,800.00
Credit
Purchases£1,500.00
Input VAT£300.00
Why?
- Trade payables: liability decreases → debit
- Purchases: expense reduced → credit
- Input VAT: asset decreases → credit
Calculation
- VAT: 20% of £1,500.00 = £300.00
- Gross amount: £1,500.00 + £300.00 = £1,800.00
Typical mistake
Booking the credit note as income.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
We return damaged goods worth £1,900.00 plus 20% VAT to Hughes Trading and receive a credit note.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for goods returned to a supplier?
Example: Trade payables £1,800.00 / Purchases £1,500.00, Input VAT £300.00.
How do I recognise this case?
Faulty goods go back and we get a credit note. The purchase entry is reversed in part, including the input VAT.
What is the typical mistake?
Booking the credit note as income.