Accounting 2.2

Returns of Inventory

Reasons for inventory returns

• Inventory is damaged/faulty

• Inventory is the wrong size/color/shape

• Too many items were purchased

• Customer has changed their mind

Types of Inventory Returns

1. Purchase Returns

• Business → Supplier

2. Sales Returns

• Customer → Business

Credit Note

A source document that provides evidence that a sales or purchases return has occurred.

Issued by the supplier of the inventory sold on credit and is now accepting it back as a return.

Use original Selling Price of the inventory.

Purchase Returns

When a business returns inventory bought on credit from a supplier.

Double Entry - Purchase Returns

Dr	Accounts Payable
Cr	Inventory

Use Cost Price of original purchase

Effect on Accounting Equation - Purchase Returns

Assets	Decrease	cost price
Liabilities	Decrease	cost price
Owner’s Equity	No Effect	0

Sales Returns

When a customer returns inventory sold on credit to a business.

Double Entry - Sales Return

Dr Cr	Sales Return Accounts Receivable	selling price
Dr Cr	Inventory Cost of Sales	cost price

Effect on Accounting Equation - Sales Returns

Assets	Decrease	- Accounts Receivable + Inventory
Liabilities	No Effect	0
Owner’s Equity	Decrease	- Sales Return + Cost of Sales

Inventory Card Entry - Purchase Returns

POV: customer

• Recorded in the inventory card OUT column

• Cost price from original purchase from Credit Note provided by supplier (FIFO not applied)

Inventory Card Entry - Sales Returns

POV: supplier

• Recorded in the inventory card IN column

• Cost price using reverse FIFO: Assume that the last inventory out is the first inventory to be returned