Journal entry for refund from vendor

Overview

In business, the company may receive a refund from its vendor or supplier due to various reasons such as the return of goods or a mistake of overcharged invoice. Likewise, the company needs to make the journal entry for refund from vendor or supplier in order to account for the cash received as well as to correct the balance of the asset or the amount of purchase or expense that it has before the refund.

There are various reasons for the company to return the purchased goods to get the refund from the supplies include the defective goods, damage of goods, as well as the wrong specification of goods, or the company simply no longer needs the purchased goods and the goods are still in the return period. And another case of refund is that there is a mistake in the invoice that results in the vendor or suppliers overcharge the company on its purchase.

In this case, the vendor will usually refund the company for the overcharged amount. Of course, the vendor may also choose to issue the credit memo to its customer of stead of the refund if the company agrees.

Journal entry for refund from vendor or supplier is a bit different for inventory goods from one company to another if one company uses the perpetual inventory system and another company uses the periodic inventory system. However, it is usually the same for the not-inventory goods as it is simply the reverse of the original journal entry based on the amount of the refund.

Journal entry for refund from vendor

Refund related to inventory goods

Perpetual inventory system

Under the perpetual inventory system, the company records the purchase transaction of inventory into the inventory account as the balance of inventory needs to be updated perpetually. Likewise, the refund event which results in the original purchase being void (due to return of goods) or in the reduction of cost of inventory goods (due to overcharged invoice) will directly impact the inventory account.

In this case, the company can make the journal entry for refund from the vendor for the inventory goods that it has purchased by debiting the cash or bank account for the amount and crediting the same amount into the inventory account.

Account	Debit	Credit
Cash/bank	000
Inventory		000

In this journal entry, the credit of the inventory account is to reduce its balance by the amount of refund that the company receives. As cash and inventory are both asset items on the balance sheet, there is zero impact on total assets in this transaction.

Also, the credit of the inventory account in this journal entry is required in order to have a correct balance of inventory on the balance sheet regardless the refund event is due to the mistake of overcharged invoice or due to the returns of purchased goods.

Periodic inventory system

Under the periodic inventory system, the company records the purchase of inventory goods into the purchase account instead of recording it directly into the inventory account like that of the perpetual inventory system. This is due to the inventory will only be updated when the company performs the actual physical count of the inventory (usually at the end of the period).

Hence, the refund event here will usually be related to the purchase account instead of the inventory account. However, the company that uses the periodic inventory system usually has the purchase returns and allowances account in order to record the transactions of the goods returns or other compensations that the company receives from vendors or suppliers.

Likewise, under the periodic inventory system, the company can make the journal entry for refund from vendor or supplier by debiting the cash or bank account and crediting the purchase returns and allowances account.

Account	Debit	Credit
Cash/bank	000
Purchase returns and allowances		000

In this journal entry, the purchase returns and allowances account is the contra account to the purchase account and its normal balance is on the credit side. Likewise, this journal entry will reduce the net purchase by the refund amount that the company receives from the vendor or supplier.

Example of refund from vendor

For example, on October 15, the company ABC, which uses the perpetual inventory system, receives a $1,000 refund from its vendor for the inventory goods it has purchased and paid the previous week. The $1,000 refund is the amount of overcharged that the vendor has made a mistake by putting the wrong price in the invoice resulting in the total amount of purchased goods increase from its correct cost of $18,000 to $19,000. The refund money is transferred directly from the vendor to the company’s bank account.

In this case, the company ABC can make the journal entry for refund from vendor on October 15 by debiting the $1,000 into the bank account and crediting the same amount to the inventory account.

Account	Debit	Credit
Bank	1,000
Inventory		1,000

In this journal entry, the balance of the inventory on the balance sheet will be reduced by the refund amount of $1,000 to reflect the actual cost of $18,000 of the purchased inventory. Without this journal entry, the $19,000, which is the wrong amount, will still be included on the balance sheet of the company ABC.

Example 2:

For another example, on October 31, the company XYZ receives a $5,000 cash refund from its supplier for the defective goods that it has returned back to the supplier. The $5,000 is the original cost of the defective goods it has purchased using cash in the previous week. The company XYZ uses the periodic inventory system.

In this case, as the company XYZ uses the periodic inventory system, it can make the journal entry for the $5,000 refund on October 31 by recording the refund amount into the purchase returns and allowances account as below:

Account	Debit	Credit
Cash	5,000
Purchase returns and allowances		5,000

After this journal entry, the net purchase (purchase – purchase returns and allowances) will reduce by $5,000 for the refund that the company XZY receives from its supplier.

Refund related to other assets or expenses

The company may also receive a refund from its vendor or supplier for the asset, such as office supplies, it has purchased or the expenses it has incurred which in this case the refund is not related to the inventory goods at all. In this case, the journal entry for refund will be the same for the company that uses the perpetual inventory system and that the one that uses the periodic inventory system.

Likewise, the company can make the journal entry for refund from vendor or supplier by debiting the refund amount into the cash account or bank account and crediting the asset or expense account.

Account	Debit	Credit
Cash/bank	000
Asset/expense		000

In this journal entry, the credit of the asset or expense account is to reverse or remove the excess amount from the balance sheet (for the asset) or the income statement (for the expense). For the case of refund for the purchased asset (either due to the returns or overcharged invoice), there is zero impact on the total assets of the balance sheet as one asset (cash) increases while another asset (returned goods) decreases.

On the other hand, for the case of refund for overcharge expenses, total assets on the balance sheet will increase while total expense on the incomes statement will decrease by the same amount of refund.

Example 3

For example, on October 31, the company ABC receives a cash refund of $200 from its vendor for the mistake in the invoice of the repair and maintenance service that the vendor has provided on a piece of equipment previously. The company ABC has paid and recorded $1,000 of repair and maintenance expenses. However, the repair and maintenance service only cost $800 but there was a mistake of the overcharged invoice that results in the refund of $200 from the vendor.

In this case, the company ABC can make the journal entry for the $200 refund by debiting this amount into the cash account and crediting the same amount into the repair and maintenance expense account.

Account	Debit	Credit
Cash	200
Repair and maintenance expense		200

In this journal entry, the $200 credit of repair and maintenance expense is to reduce the expense from $1,000 to its correct amount of $800 as this is supposed to be recorded in the first place if there’s no mistake in the invoice.