Journal Entry For Inventory Return

An inventory return is a transaction that adjusts the inventory balance of a business by returning items to suppliers. This transaction can be used in the three scenarios of short shipping or receiving damaged goods, overcharged unit price, and post-order application of discount/supplier credit.

In all cases, the supplier return has three states: Canceled, Draft, and Authorized. Depending on the scenario, the journal entry for the inventory return will vary and involve the debiting of inventory and the crediting of accounts payable.

The journal entry serves to account for the raw material and finished goods that have been returned to the supplier and to ensure that the associated accounts receivable and accounts payable are properly adjusted.

Journal Entry for Inventory Return

In a perpetual inventory system, the inventory is tracked on a continuous basis. This means that the company knows exactly how much inventory it has on hand at any given time. When a customer returns inventory, the company simply reduces the inventory balance and the accounts payable balance.

In a periodic inventory system, the inventory is not tracked on a continuous basis. Instead, the company takes a physical count of its inventory at the end of each accounting period. When a customer returns inventory, the company records a journal entry that reduces the accounts payable balance and credits a temporary account called “Purchase Return.” At the end of the accounting period, the company closes the Purchase Return account and reduces the inventory balance by the amount of the returns.

Purchase return is the temporary account that will use to account for the cost of goods sold at the end of the month.

Example of Inventory Return

Company ABC purchases inventory from the supplier overseas amount $ 230,000. Due to quality issues, company has decided to return the inventory amount $ 30,000. The supplier also accepts the return and reverses the entry. Please prepare a journal entry for ABC regarding inventory return.

Perpetual Inventory System

Under a perpetual inventory system, it will require to record inventory and accounts payable when purchasing. So when inventory is returned, it will impact both inventory accounts and accounts payable.

The journal entry is debiting accounts payable $ 30,000 and credit inventory $ 30,000.

Periodic Inventory System

Under periodic inventory system, the company will record accounts payable and purchase account when purchasing inventory. So when inventory is return, it will impact accounts payable and purchase return accounts.

The journal entry is debiting accounts payable $ 30,000 and credit purchase return $ 30,000.