Journal entry for return of damaged goods to supplier

Introduction

In business, we usually need to return the damaged goods that we have purchased back to the supplier in order to receive the cash refund or the credit if the purchase is on the account. Likewise, we need to make the journal entry for the return of damaged goods to the supplier in order to remove the goods from our account as well as to account for the cash refund or the credit received for the return transaction.

As we will need to deal with the inventory goods, there will be a different journal entry for the periodic inventory system compared to the perpetual inventory system for the return transaction. In other words, we will use the goods return account, e.g. purchase returns and allowances account, for the return transaction if we use the periodic inventory system.

On the other hand, we will directly deduct the balance of the inventory goods based on the amount of goods return if we use the perpetual inventory system. This is due to, under the perpetual inventory system, the balance of the inventory will need to be updated perpetually, e.g. every time there is an inventory in or out.

Journal entry for return of damaged goods to supplier

As mentioned, since we have to deal with the reduction of the inventory goods when we return the damaged goods back to the supplier, we need to consider whether we are using the periodic inventory system or the perpetual inventory system before making the journal entry. After all, one system will use the temporary account to record this transaction while another system will directly deduct the balance of the inventory on the balance sheet.

Periodic inventory system

We can make the journal entry for the return of damaged goods to the supplier by debiting the accounts payable or cash account and crediting the purchase returns and allowances account if we use the periodic inventory system.

As the name suggested, under the periodic inventory system, we only need to update the balance of inventory periodically, e.g. once every accounting period. And it is usually done when we need to calculate the cost of goods sold in order to prepare the financial statements at the end of the accounting period.

Hence, in this journal entry, we use the purchase returns and allowances account in order to account for the return transaction instead of using the inventory account. This purchase returns and allowances account is a temporary account that will offset the purchases account at the end of the period. Likewise, its normal balance is on the credit side which is the opposite of the purchases account.

Perpetual inventory system

On the other hand, if we use the perpetual inventory system, we can make the journal entry for the return of damaged goods to the supplier with the same account on the debit side but we will use the inventory account instead of the purchase returns and allowances account on the credit side.

In this journal entry, we directly credit the inventory account as a result of reducing the inventory goods due to the return transaction. Unlike the periodic inventory system, there are no purchase returns and allowances account under the periodic inventory system. Any transaction related to the inventory will go directly to the inventory account.

Example for return of damaged goods to supplier

For example, on January 31, we returns the $5,000 of the merchandise goods, that we have purchased on credit from one of our suppliers on January 10, due to the damage. We have properly recorded the purchase transaction on January 10 upon receiving the goods.

We use the periodic inventory system in the company to manage the movement of the inventory goods. And on the same day of January 31, the supplier has credited the $5,000 to our account upon receiving the damaged goods back as we are still in the period that we can return the purchased goods.

As we use the periodic inventory system, we can make the journal entry for the return of $5,000 damaged goods to the supplier on January 31, by debiting this $5,000 to the accounts payable and crediting the same amount to the purchase returns and allowances account.

This $5,000 of the purchases returns and allowances account will offset with the purchases account at the end of the accounting period when we calculate the cost of goods sold for the income statement.

Example 2:

Assuming we use the perpetual inventory system, instead of the periodic inventory system, in the example of returning the $5,000 damaged goods back to the supplier above.

In this case, as we use the perpetual inventory system instead, we will record the return of the $5,000 damaged goods to the supplier by directly deducting the $5,000 from the balance of inventory as below:

This journal entry of return of damaged goods to the supplier under the perpetual inventory system will decrease both total assets and total liabilities on the balance sheet by $5,000 as of January 31.