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BK-CPA
BK-CPA , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I bought 200 items from a vendor that I put into my inventory

Customer Question

I bought 200 items from a vendor that I put into my inventory (via a journaly entry). I found out that 150 of these items are damaged and I need to ship them back to the vendor. They have already agreed to replace the items. What is my journal entry now (to remove them from inventory)?
Submitted: 3 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 3 years ago.

rakhivasavada :

Dear Friend, Hello and welcome...

rakhivasavada :

Kindly be online as I prepare your reply..

rakhivasavada :

I am preparing your reply.. Kindly be online for a minute or two..

rakhivasavada :

I believe that is a merchandise.

JACUSTOMER-3sz2jqyl- :

yes it is

rakhivasavada :

It is NOT a raw material, but a merchandise, as I understand.

JACUSTOMER-3sz2jqyl- :

yes

rakhivasavada :

Will you be incurring any additional replacement costs ?

JACUSTOMER-3sz2jqyl- :

no

rakhivasavada :

Fine, as I now understand, you will just give them 150 damaged pieces and they will give you 150 pieces back, undamaged and new.

rakhivasavada :

This is non financial transaction and therefore NO journal entry would be required.

JACUSTOMER-3sz2jqyl- :

exactly

JACUSTOMER-3sz2jqyl- :

but I am not getting the inventory back until next month

JACUSTOMER-3sz2jqyl- :

and I have already sent the damaged goods back

rakhivasavada :

its fine...

rakhivasavada :

even then, no financial transaction is done. So, as I said, This is non financial transaction and therefore NO journal entry would be required.

JACUSTOMER-3sz2jqyl- :

so arent I overstating my inventory?

rakhivasavada :

No, because, getting it exchanged is an administrative thing and not an accounting stuff. You would have been overstating it in case of "Purchase Returns" where in you return it and they would have paid you back your money. OR journal entry would have been required if you would have incurred any higher replacement costs. This would have been charged to COGS.

rakhivasavada :

In this case, this being a non financial transaction and therefore NO journal entry would be required.

JACUSTOMER-3sz2jqyl- :

I dont understand....when I do my inventory at the end of this month, the merchandise is not there

JACUSTOMER-3sz2jqyl- :

I have to show the deduction somewhere

JACUSTOMER-3sz2jqyl- :

this month until I receive the new items next month

rakhivasavada :

I understand. If you are using Periodic system of accounting, no entry is required.

rakhivasavada :

Under Perpetual inventory, you will DEBIT Cost of sales and Credit Inventory by that much number.

rakhivasavada :

Just for self help, this is an excellent resource.

rakhivasavada :

http://accounting-financial-tax.com/2009/02/journal-entry-for-inventory-transactions/

JACUSTOMER-3sz2jqyl- :

Ok my first thought was to debit COGS

JACUSTOMER-3sz2jqyl- :

but why would it be my expense?

JACUSTOMER-3sz2jqyl- :

these are items that will be returned to be

rakhivasavada :

It would be to temporarily reduce the Inventory balance as the units have been sent.. You will credit it back once you receive next month.

rakhivasavada :

so, you will tally your current month.

rakhivasavada :

and not overstate, as you say.

JACUSTOMER-3sz2jqyl- :

so for this month it should be considered my expense/

JACUSTOMER-3sz2jqyl- :

?

rakhivasavada :

yes, that is right, Debit COGS, / Cost of sales today, reduce the balance for this month. Credit it later next month again to bring the Inventory to the same level. You are just temporarily reducing it. This is a Contra Accounting entries.

rakhivasavada :

This is the most proper method. Had you have returned permanently with no intention to replace, the normal purchase returns entries would have been done.

JACUSTOMER-3sz2jqyl- :

ok thanks

rakhivasavada :

You are most welcome...

rakhivasavada :

I hope this helps...

Rate this answer POSITIVELY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.

Warm Regards,

rakhivasavada :

Is there anything more I can assist you with ? Please do not hesitate to revert with further queries if you have. It would be total pleasure to assist you.

rakhivasavada :

Rate this answer POSITIVELY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.

Expert:  BK-CPA replied 3 years ago.

Hello and thank you for your question.

.

Upon returning the inventory, you would credit inventory and debit a receivable for the balance to be received in a future period. Running this through cost of sales will impact net income and cause a misstatement in your financials.

.

Keep in mind that tax basis accounting and generally accepted accounting principles are different. If you are a cash basis taxpayer and you have paid for the inventory, then you could probably leave the amount in cost of sales (note that true cash basis inventory accounting is generally not accepted for tax purposes, so this is pending your specifics).

.

I hope this is helpful.