Understanding returns inwards and outwards

Goods do not always stay sold. A customer may send items back because they are faulty or unwanted, and a business may return goods to its own supplier for the same reasons. Accounting has two terms for these opposite events: returns inwards and returns outwards.

They sound almost the same, but the goods move in different directions and are treated in different parts of the accounts. Knowing the direction behind each name makes the pair easy.

Two directions of returned goods

Inwards and outwards describe which way the goods travel, seen from the business’s own doorstep. Returns inwards are goods coming back in to us, sent back by a customer we sold to. Returns outwards are goods going back out from us, returned by us to a supplier we bought from.

Returns inwards: the sale that reverses

When a customer returns goods, the original sale is partly or wholly undone. We sold the goods and some have come back, so the value of what we really sold is smaller. Returns inwards reduce sales.

They are often called sales returns, which says it directly. Suppose a business recorded RM1,000 of sales but RM150 of goods came back.

The true value of goods that stayed sold is RM850. The returns inwards figure captures the RM150 reduction, so the accounts show what was sold and not just what was invoiced.

Returns outwards: the purchase that reverses

Returns outwards work the same way for buying. When we send goods back to a supplier, the original purchase is partly undone. We bought the goods and some have gone back, so the value of what we kept is smaller.

Returns outwards reduce purchases, and are also called purchases returns. Suppose a business bought RM2,000 of goods but returned RM300.

The true value of purchases kept is RM1,700. The returns outwards figure records the RM300 reduction.

Why they sit on opposite sides

Returns inwards reduce sales, and sales are income. So returns inwards work against income. Returns outwards reduce purchases, and purchases are a cost. So returns outwards work against a cost.

Income and costs sit on opposite sides of the income statement, so their reversals do too. The two returns are opposites because the things they reverse are opposites.

Reductions, not new income or expense

A common mistake is to treat a return as a brand new income or expense. Each return is a correction to something already recorded. Returns inwards are not an expense.

They are sales that did not stick. Returns outwards are not income. They are purchases that were undone.

Thinking of them as reductions stops you double counting or placing them in the wrong section. The goods went one way and then came back, and the accounts show that the earlier figure was too large.

Why the distinction matters

The two returns affect different measures. Returns inwards feed into net sales, and so into how much revenue the business can claim. Returns outwards feed into the cost of goods the business bought, and so into how much it truly spent on inventory.

If they were merged or swapped, both revenue and cost would be misstated, and the profit that depends on them would be wrong.

A memory picture

Picture the flow of goods around your own shop. Anything a customer carries back through your door is a return inwards, and it eats into what you managed to sell. Anything you pack up and send back to a supplier is a return outwards, and it reduces what you count as bought.

Because the direction is always judged from your own premises, the labels match a physical picture you can imagine. Whenever a question mentions goods sent back, ask whether they are arriving at your door or leaving it. The right label follows.

Summary

Returns inwards and outwards are mirror images. Inwards means goods coming back from customers, which reduces sales.

Outwards means goods going back to suppliers, which reduces purchases. Each return is a reversal of the transaction it relates to.

If returns inwards and outwards still cause confusion, one of our teachers can work through examples with your child, including how each return is posted in the ledger. Book a trial class