Audit of Purchases3 min read

What are Purchases?

Purchases are the acquisition of goods or services for personal or business use. In a business context, purchases are transactions in which a company acquires goods or services from another company or individual in order to produce or resell the goods or services. Purchases are typically made with the intention of generating revenue by selling goods or services at a profit. In personal terms, purchases are transactions in which an individual acquires goods or services for their own use or consumption. Purchases may be made with cash, credit, or other forms of payment.

Audit of Purchases

An audit of purchases is a review of a company’s purchasing records to ensure the accuracy and completeness of the reported figures. This type of audit is typically performed by an independent auditor. He/she will review the company’s purchasing transactions, contracts, invoices, and other relevant documents. This is to verify that the purchases have been accurately recorded and reported. The audit may also include testing of internal controls over the purchasing process. For example, verifying that the company has adequate policies and procedures in place to prevent errors and fraud. The goal of an audit of purchases is to provide assurance that the company’s financial statements accurately reflect its purchasing activity.

Purchase Returns

Purchase returns, also known as returns outward or return outwards, refer to the process of returning goods by a buyer to the seller. This can happen for various reasons, such as:

1. Defective or Damaged Goods: If the received goods are defective, damaged, or not as per the specifications, the buyer may return them to the seller.

2. Excess Goods: If the buyer ordered more goods than needed or received more than the agreed quantity, they might return the surplus.

3. Wrong Goods Received: If the seller sends the wrong items, the buyer may return them and request the correct products.

In accounting, a purchase return is recorded as a credit note or debit note, depending on whether the buyer is returning goods to the seller or vice versa. This helps in adjusting the accounts and maintaining accurate financial records. The entry typically involves decreasing accounts payable or accounts receivable, depending on the perspective of the transaction.

Debit Notes

A debit note is a document used in financial transactions to inform a buyer or debtor that they owe additional money to the seller or creditor. It serves as a formal request for payment and is often issued for various reasons, such as:

1. Goods Returned: In cases of returned goods (purchase returns), a debit note is issued to inform the buyer that their account needs to be debited for the returned items.

2. Overcharging: If there was an error in the original invoice, resulting in an undercharge to the buyer, a debit note is issued to correct the mistake and request additional payment.

3. Additional Charges: If there are additional charges such as interest, penalties, or fees, a debit note is used to notify the debtor of the increased amount owed.

In accounting, when a debit note is issued, it is recorded as a debit entry in the relevant account to reflect the increased amount receivable. The corresponding credit entry is usually made to a contra account, such as a sales returns or allowances account. This helps maintain accurate financial records and ensures that both parties are aware of the adjustments made to the original transaction.