Question

I'm trying to understand why purchase returns are considered a deduction on the retail side of the cost/retail ratio. It makes sense to me that it would be a deduction on the cost side since there is less inventory purchased, but how would this decrease in inventory purchased affect the cost of the goods sold? Thanks.

Answer 1

Purchase returns are considered as a deduction on both sides the cost as well as retail.

The retail inventory method, requires details/record for both cost as well as retail value in terms of purchases, goods available for sale and sale.

Now when inventory is returned, goods available for sale reduces and the record is being kept for both the cost as well as retail value and simultaneously both reduce as there is decrease in qunatity.

It not affecting the cost of goods sold, it affecting the ratio and ratio is used for inventory valuation.

This is done to set the rigt cost to retail ratio.

I hope this clears your doubt. Thanks!