Canada Accounting Entries for Returning Goods (Outward)


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Hi all, I am new to this forum and also new to accounting. I have one question.

1. We bought 500 items @ 50 each from our regular supplier (on account). We then added the items to our inventory.
2. Later we found out that 30 items were defective or some issues. So we decided to return them.

What accounting entries do we have to make in this case?
 
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J

John Baker

You can book this two ways, depending on how detail and "feed back" you your managers want to go. First way is to simply follow the entry that was made when the product(s) were purchased:
Originally:
Inventory 25,000 Dr.
Accounts Payable 25,000 Cr.

Returned Product
Accounts Payable 1,500 Dr.
Inventory 1,500 Cr.

If your managers track the comings and goings of product purchases, compare actual activity to budgeted, performance reporting by QC and so forth, you might consider booking the return this way:
Originally:
Inventory - hand buzzers 25,000 Dr
Accounts Payable - trade 25,000 Cr.

Returned Product
Accounts Payable - trade 1,500 Dr.
Inventory - hand buzzers 1,500 Cr.
return of 30 hand buzzers that are defective. RA#123-not funny. (RA- Return Authorization)

Observation:
Some bookkeepers would debit Accounts payable and credit an account called Purchase Returns, instead of directly reducing the Inventory account. Although correct in the descriptive sense, this entry never reduces the stated value of the specific inventory account itself. Thus, the specific item book value of inventory is overstated. Some would argue that the follow up month end physical count and/or a cycle count would correct the count - thus the extended value(s), a credit to Inventory and a charge to other account(s) will accomplish the same result. Usually and account called Inventory Shrinkage, or Inventory Pickup/Loss gets the hit. This method that I just described is not a preferred method of recording and reporting returns of purchased trade product/inventory.
 

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