When a customer returns purchased inventory, you must account for the return in two ways. The first must reflect the return in your revenue and returns and allowances accounts; the second affects your inventory levels and cost accounts. The essential concept you must apply to your journal adjustments is the accounting rule of debits and credits. Debits and credits in accounting produce opposite results to what we traditionally associate with negative and positive entries. Failure to follow the debits and credits rules produces inaccurate adjustments to your journal.
Debit your returns and allowances account for the amount for which you sold the inventory. In most cases, the sales amount you charge customers is higher than the actual cost of the inventory. A debit is entered as a negative figure, but the end result is an increase to your returns and allowances balance.
Credit your accounts receivable account the cost of the return if your customer purchased the inventory on credit and is billed through invoicing. A credit is entered as a positive figure in your accounts receivable account, but it actually decreases your accounts receivable balance. If the customer purchased the inventory by cash, check or credit card, credit your cash account instead of your accounts receivable account.
Debit your inventory account for the value of the inventory, or the cost of the merchandise you purchased. This increases your inventory account and reflects the inventory added back to your stock.
Credit your cost of goods sold account for your cost of the inventory. This decreases your cost of goods sold expense account.