Journal Entry for Inventory Return

Inventory return is the items that company needs to return back to the supplier due to various reasons. It is the purchase return that company returns back to the sellers.

A company’s inventory refers to the raw materials, finished products, and work-in-progress that it has on hand. The inventory is important for several reasons. First, it helps to ensure that a company has the raw materials to produce the finished goods and sell for revenue.

Second, the inventory can be the finished goods that the company purchase and resell to the customers. It is important to keep the inventory in stock and fulfill the customer demand. A healthy inventory indicates that a company is able to meet customer demands and keep up with its production schedule.

The company has to purchase these types of inventory from the suppliers. The company needs the supplier to deliver the inventory which meets the requirement of their production. Poor quality material will impact production. The poor quality finished goods will not good for reselling to the customers.

It will lead to the return of inventory when the company receives low-quality ones. It also happens when the inventory is the damaged or wrong specification.

Journal Entry for Inventory Return

The recording of inventory returns is slightly different when we consider the inventory system that company uses. There are two systems which are the periodic and perpetual systems.

Perpetual Inventory System

Under the perpetual inventory system, the inventory is tracked by the time it is sold to the customers. The company can know exactly the inventory level at any time during the month.

When purchasing the inventory, company records debit inventory and credit accounts payable or cash paid. If the company returns the inventory to supplier, it will impact the accounts payable and inventory.

The journal entry for inventory return is debiting accounts payable and credit inventory.

The journal entry is very straightforward, it simply reduces the inventory amount and accounts payable.

Periodic Inventory System

Under the periodic system, the inventory balance is updated at the end of the month when the company conduct the physical count.

When companies purchase inventory, they have to record inventory and accounts payable. But when returning the inventory, they have to record debit accounts payable and purchase returns which is the temporary account.

The journal entry is debiting accounts payable and credit purchase return.

Instead of reducing the inventory balance, the entry credit the purchase return which is the temporary account.

In a periodic system, company is only able to know the inventory balance at the end of the month. The purchase return will reduce the inventory balance at the end of the month.

Example

Company ABC just purchase the inventory amount $ 100,000 from the supplier. However, after the inspection, 10% of the inventory is not meet the company requirement. After the negotiation, the seller and ABC agree to return the inventory. Please prepare a journal entry for inventory return under both systems.

Under the Perpetual inventory system

The journal entry is debiting accounts payable $ 10,000 and credit inventory $ 10,000.

Under the periodic inventory system

The journal entry is debiting accounts payable $ 10,000 and credit purchase return $ 10,000.