Journal entry for return inward

Introduction

Return inward is a sale return that the customer returns back to us for some reason. Likewise, we need to make the journal entry for the return inward in order to refund the customers back with cash or to credit their balance.

As the return inward will result in the increase of the inventory goods in our warehouse, we may need to also make the journal entry for the increase of inventory goods together with the reduction of the cost of goods sold if we use the perpetual inventory system.

In this case, we also need to verify whether the goods returned are due to damage or defective. This is because if the customer returns the purchased goods due to the damage, we need to record the estimated value of the goods after damage to the inventory account instead of recording their original value.

Journal entry for return inward

We can make the journal entry for return inward by debiting the return inward account and crediting the accounts receivable or cash account.

Account	Debit	Credit
Return inward	XXXX
Accounts receivable/cash		XXXX

In this journal entry, the return inward account is a contra account to the sales revenue account on the income statement. Likewise, this journal entry will decrease our net sales by the amount of return inward.

This journal entry is made to account for the goods return transaction that the customer has returned the goods back to us for some reason. Likewise, as the goods are returned back to our inventory, we also need to make another journal entry to account for the returned inventory goods, if we use the perpetual inventory system, as below:

Account	Debit	Credit
Inventory	XXXX
Cost of goods sold		XXXX

On the other hand, if we use the periodic inventory system, we do not need the journal entry for the inventory and the cost of goods sold above as we usually do not record the outflow of inventory goods in the first place. This is due to, under the periodic inventory system, the balance of inventory is updated periodically, which is usually once a year.

Return inward example

For example, on March 1, we have a $2,000 return inward of the inventory goods from one of our customers. This $2,000 of inventory goods is the amount that we have sold to our customer on credit last month.

The goods are still in good condition and they are not defective. However, as the customer returns the goods during the return period, we need to accept the goods back and credit the customer’s account in full.

These inventory goods have an original cost of $1,200 in our inventory. And we use the perpetual inventory system in order to keep track of the inventory balance in our accounting record.

In this case, we can make the journal entry for the return inward of $2,000 on March 1, by debiting this amount to the return inward account and crediting the same amount to accounts receivable as below:

March 1:

Account	Debit	Credit
Return inward	2,000
Accounts receivable		2,000

At the same time, we also need to record the $1,200 increase in the inventory as a result of the return transaction as below:

March 1:

Account	Debit	Credit
Inventory	1,200
Cost of goods sold		1,200

Return inward for damaged goods

As mentioned, if the goods are returned due to the damage, we need to value the goods at their damage state. Hence, its value will decrease and we need to record at a lesser value than their original cost.

For example, if the customer has returned the goods in the example above for the reason of the damage and their value are evaluated to be only $500 due to the damage, we need to debit the inventory only by $500 instead of $1,200.

If that is the case, the journal entry for return inward and that of the increase of the inventory and the reduction of the cost of goods sold due to the return transaction will be as below instead:

March 1:

Account	Debit	Credit
Return inward	2,000
Accounts receivable		2,000

Account	Debit	Credit
Inventory	500
Cost of goods sold		500