Home > Topics > Foundation – Paper 1 – Accounting > Subsidiary Books - Part 2 (Returns and Bills Books)

Subsidiary Books - Part 2

"Returns and bills - handling the reverse flow and credit instruments."

After learning Purchases and Sales Books, we now cover books for goods returned and bills of exchange.

Books Covered in This Lesson

1. Purchases Returns Book

↓

2. Sales Returns Book

↓

3. Bills Receivable Book

↓

4. Bills Payable Book

Loading diagram…

1. Purchases Returns Book (Returns Outward Book)

Purpose: Record goods returned TO suppliers (credit purchases returned).

What to Record:

✓ Credit purchases returned
✗ Cash purchases returned (in Cash Book)
✗ Sales returns (different book)

Format

Date | Supplier Name | Debit Note No. | L.F. | Amount (₹)
-----|--------------|----------------|------|----------
Jan 5| Ram & Co.    | DN-101         |      | 5,000
Jan 8| ABC Ltd.     | DN-102         |      | 8,000
Jan15| Mohan Traders| DN-103         |      | 3,000
-----|--------------|----------------|------|----------
     | Total        |                |      | 16,000

Posting to Ledger

Individual Posting:

Debit each supplier's account (reduces liability)

Periodic Total Posting:

At month-end: Credit Purchases Returns Account with total

Example Ledger Entries:

Ram & Co. Account

Dr.                  Ram & Co. A/c                  Cr.
------------------------------------------------------------
Jan 5 | By Purchases Returns | 5,000 |

Purchases Returns Account

Dr.               Purchases Returns A/c            Cr.
------------------------------------------------------------
                |                | Jan 31 | By Sundry Creditors | 16,000
(Total from Purchases Returns Book)

2. Sales Returns Book (Returns Inward Book)

Purpose: Record goods returned BY customers (credit sales returned).

What to Record:

✓ Credit sales returned
✗ Cash sales returned (in Cash Book)
✗ Purchases returns (different book)

Format

Date | Customer Name     | Credit Note No. | L.F. | Amount (₹)
-----|------------------|-----------------|------|----------
Feb 3| Sharma Stores    | CN-201          |      | 6,000
Feb 7| Gupta Enterprises| CN-202          |      | 12,000
Feb10| City Mall        | CN-203          |      | 4,000
-----|------------------|-----------------|------|----------
     | Total            |                 |      | 22,000

Posting to Ledger

Individual Posting:

Credit each customer's account (reduces asset/receivable)

Periodic Total Posting:

At month-end: Debit Sales Returns Account with total

Comparison: Purchases vs Sales Returns

Basis	Purchases Returns	Sales Returns
Other Name	Returns Outward	Returns Inward
Direction	We return goods to supplier	Customer returns goods to us
Document	Debit Note issued to supplier	Credit Note issued to customer
Individual Posting	Debit Supplier's A/c	Credit Customer's A/c
Total Posting	Credit Purchases Returns A/c	Debit Sales Returns A/c
Effect	Reduces our liability	Reduces our asset

Loading comparison…

3. Bills Receivable Book

Purpose: Record bills accepted BY customers (we will receive money).

What is a Bill Receivable?

A bill of exchange where the customer (debtor) accepts to pay us
It's an asset for us (right to receive money)

Format

Date | From Whom Received | For What   | Due Date  | L.F. | Amount (₹)
-----|-------------------|-----------|-----------|------|----------
Mar 2| Ramesh            | Goods sold| 2nd May   |      | 50,000
Mar 8| Suresh            | Old debt  | 8th June  |      | 30,000
-----|-------------------|-----------|-----------|------|----------
     | Total             |           |           |      | 80,000

Posting to Ledger

Individual Posting:

Credit the respective debtor's account (liability settled)

Periodic Total Posting:

Debit Bills Receivable Account with total

4. Bills Payable Book

Purpose: Record bills we accepted TO creditors (we will pay money).

What is a Bill Payable?

A bill of exchange where we (the debtor) accept to pay the creditor
It's a liability for us (obligation to pay)

Format

Date | To Whom Given  | For What      | Due Date  | L.F. | Amount (₹)
-----|---------------|--------------|-----------|------|----------
Apr 3| Mohan & Co.    | Goods bought | 3rd July  |      | 40,000
Apr10| XYZ Suppliers  | Old dues     | 10th Aug  |      | 25,000
-----|---------------|--------------|-----------|------|----------
     | Total          |              |           |      | 65,000

Posting to Ledger

Individual Posting:

Debit the respective creditor's account (liability reduced)

Periodic Total Posting:

Credit Bills Payable Account with total

Real-World Case Study

❗ Scenario:

D-Mart (Avenue Supermarts) handles thousands of product returns daily from expired/damaged goods. They use automated subsidiary books to track all returns.

💡 Analysis:

Integrated ERP system with: (1) Sales Returns Book auto-updated when store accepts customer return, (2) Purchases Returns Book updated when goods shipped back to supplier (Britannia, Nestle, etc.), (3) Real-time ledger posting to supplier accounts

✅ Outcome:

99.8% accuracy in supplier payments, automated debit note generation, reduced disputes, and accurate P&L calculation (returns reduce gross profit).

Loading case study…

Transaction Flow Timeline

Day 1

Goods Purchased

Purchased goods worth ₹1,00,000 from ABC Ltd on credit. Recorded in Purchases Book.

Day 5

Goods Returned

Found defective items worth ₹10,000. Issued Debit Note DN-101 to ABC Ltd. Recorded in Purchases Returns Book.

Day 10

Bill Accepted

Accepted bill of ₹90,000 payable in 60 days. Recorded in Bills Payable Book.

Day 70

Bill Honored

Paid ₹90,000 on due date. Recorded in Cash Book.

Loading timeline…

Summary of All Subsidiary Books

Note

Complete List:

Purchases Book → Credit purchases of goods
Sales Book → Credit sales of goods
Purchases Returns Book → Goods returned to suppliers
Sales Returns Book → Goods returned by customers
Bills Receivable Book → Bills accepted by debtors
Bills Payable Book → Bills we accepted to creditors
Cash Book → All cash & bank transactions
Journal Proper → All other transactions

Each serves a specific purpose, saving time and reducing errors!

Loading note…

Common Exam Questions

Q: Where is cash purchase return recorded?
A: Cash Book (credit side), NOT Purchases Returns Book.

Q: What document is issued for purchases returns?
A: Debit Note (to the supplier).

Q: Bills Receivable is an asset or liability?
A: Asset (we will receive money).

Quiz: Subsidiary Books Part 2

Test Your Knowledge

Question 1 of 5

1. Purchases Returns Book records:

All purchases returned

Only credit purchases returned

Cash purchases returned

Sales returned

Loading quiz…

Subsidiary Books - Part 2

Books Covered in This Lesson

1. Purchases Returns Book (Returns Outward Book)

Format

Posting to Ledger

2. Sales Returns Book (Returns Inward Book)

Format

Posting to Ledger

Comparison: Purchases vs Sales Returns

3. Bills Receivable Book

Format

Posting to Ledger

4. Bills Payable Book

Format

Posting to Ledger

Real-World Case Study

📋 Case Study: D-Mart's Returns Management System

Transaction Flow Timeline

⏳ Chronology of Events

Goods Purchased

Goods Returned

Bill Accepted

Bill Honored

Summary of All Subsidiary Books

Common Exam Questions

Quiz: Subsidiary Books Part 2

Test Your Knowledge

📋 Case Study: D-Mart's Returns Management System

⏳ Chronology of Events

Goods Purchased

Goods Returned

Bill Accepted

Bill Honored

Test Your Knowledge