Returns inwards are goods returned to the selling entity by the customer, such as for warranty claims or outright returns of goods for a credit. For the customer, this results in the following accounting transaction:
- A debit (reduction) of accounts payable
- A credit (reduction) of purchased inventory
Returns inwards do not necessarily result in a reduction of the cost of goods sold, since goods that were returned might not necessarily have been sold to third parties during the accounting period. Returns inwards may not involve goods intended for sale by the buyer at all - they may instead be fixed assets or items intended to be consumed internally and charged to expense. If so, returns inwards may also result in a reduction of a fixed assets account, or an administrative expense.
Returns outwards are goods returned by the customer to the supplier. For the supplier, this results in the following accounting transaction:
- A debit (reduction) in revenue in the amount credited back to the customer. If the supplier had already set up a reserve for returns, then this is treated as a reduction of the reserve.
- A credit (reduction) of the accounts receivable account, either against an unpaid customer invoice or as an open credit that the customer can apply to future invoices.
From the perspective of the customer, there is probably no transaction at all, since the goods are presumably returned before any related transaction is recorded in the accounting system. If a transaction has been recorded, the customer might want to wait for a credit document to be issued by the supplier, and then record the credit in its accounting system.