Journal entry for goods returned to supplier

Introduction

Sometimes, we may need to return the goods back to the supplier for some reason when the purchased goods are still in the return period. In this case, we need to make the journal entry for the goods returned to the supplier in order to record the cash refund or the credit we receive from the return transaction.

Additionally, if we use the perpetual inventory system in our business, we also need to update the inventory account as the transaction of the goods returned will reduce the balance of the inventory. On the other hand, if we use the periodic inventory system instead of the perpetual inventory system, we can just record the return transaction to the temporary account and net it off with the purchases account at the end of the accounting period.

In business, there are several reasons that we, as the customers, may need to return the goods back to the supplier, including damaged goods, defective product or wrong specification. Likewise, the suppliers usually allow us to return back the purchased goods within a certain period of time.

Journal entry for goods returned to supplier

We can make the journal entry for goods returned to the supplier by debiting the accounts payable or cash account and crediting the inventory account under the perpetual inventory system.

Perpetual inventory system:

Account	Debit	Credit
Accounts payable/cash	$$$
Inventory		$$$

In this journal entry, we directly credit the inventory account to deduct the balance of the inventory as a result of the goods being returned back to the supplier. This is due to, under the perpetual inventory system, we need to update the inventory perpetually (i.e. whenever there is an increase or a decrease of the inventory).

On the other hand, if we use the periodic inventory system, we will record the goods returned to the supplier to the temporary account, e.g. purchase returns and allowances account, instead of recording it to the inventory account.

Likewise, we can make the journal entry for goods returned to the supplier under the periodic inventory system with the debit of the accounts payable or cash account and the credit of the purchase returns and allowances account.

Periodic inventory system:

Account	Debit	Credit
Accounts payable/cash	$$$
Purchase returns and allowances		$$$

In this journal entry, the purchase returns and allowances account is a temporary account, in which its normal balance is on the credit side. This account will be cleared with the purchases account at the end of the accounting period.

Example for goods returned to supplier

For example, on January 10, we have returned $5,000 goods to the supplier as they are still in the return period that is allowed by our supplier. We have purchased these $ 5,000 goods on credit from one of our suppliers last month.

We use the perpetual inventory system in our business in order to manage and control the flow of the inventory goods in the accounting record.

In this case, we can make the journal entry for the $5,000 goods returned to the supplier by debiting this amount to the accounts payable and crediting the same amount to the inventory account as below:

January 10:

Account	Debit	Credit
Accounts payable	5,000
Inventory		5,000

This journal entry will decrease both total assets and total liabilities on the balance sheet by $5,000 as a result of the goods returned back to the supplier.

Example 2:

For this example, assuming that we use the periodic inventory system in our business instead.

If that is the case, the journal entry for the $5,000 goods returned to the supplier on January 10, will be as below instead:

Account	Debit	Credit
Accounts payable	5,000
Purchase returns and allowances		5,000

In this journal entry, the $5,000 of the purchase returns and allowances will be cleared with the purchases account when we close the year-end account.