Example of Purchase Order Returns Accounted Under Different Cost Methods

Scenario

Let’s consider that an item was bought at a purchase order price of $100.

The table lists the accounting entries created upon PO receipt.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr
Cost Accounting	PO Receipt	Inventory Valuation	100
Cost Accounting	PO Receipt	Receiving Inspection	-100

At the time of processing the return, if the item's cost hasn’t changed, these accounting entries are simply reversed. If the items's cost has changed due to any reason, returns are processed according to the cost methods used. Let’s look at how purchase order returns are processed under different cost methods.

Returns Accounted Under the Perpetual Average Cost Method

Let’s assume that the perpetual average cost is $120. The table lists the entries that are created for a return when the purchase order price is $100.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Cost Source
Cost Accounting	Return to Supplier	Inventory Valuation	-120	Perpetual average cost
Cost Accounting	Return to Supplier	Receiving Inspection	120	Perpetual average cost
Cost Accounting	Return to Supplier	Receiving Inspection	-20	Perpetual average cost – PO price
Cost Accounting	Return to Supplier	Cost Variance	20	Perpetual average cost – PO price

Returns Accounted Under the Actual Cost Method

Let’s assume that the actual receipt layer cost is $120.

When using the actual cost-based accounting, these accounting entries are generated when the PO price is $100.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Cost Source
Cost Accounting	Return to Supplier	Inventory Valuation	-120	Receipt layer cost
Cost Accounting	Return to Supplier	Receiving Inspection	120	Receipt layer cost
Cost Accounting	Return to Supplier	Receiving Inspection	-20	Receipt layer cost - PO price
Cost Accounting	Return to Supplier	Cost Variance	20	Receipt layer cost - PO price

Returns Accounted Under the Periodic Average Cost Method

In the periodic average cost method, irrespective of the periodic average cost, the inventory is always depleted at the PO price. PO return is a cost owned transaction.

The table lists the accounting entries created for a PO return when the PO price is $100.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Cost Source
Cost Accounting	Return to Supplier	Inventory Valuation	-100	PO price
Cost Accounting	Return to Supplier	Receiving Inspection	100	PO price

Receipts and Returns Accounted Under the Standard Cost Method

Let’s look at the receipt and return of a standard-costed item, where the standard cost is $110.

These accounting entries are created upon PO receipt when the PO price is $100:

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Cost Source
Cost Accounting	PO Receipt	Inventory Valuation	110	Standard cost
Cost Accounting	PO Receipt	Receiving Inspection	-110	Standard cost
Cost Accounting	PO Receipt	Receiving Inspection	10	Standard cost - PO price
Cost Accounting	PO Receipt	Purchase Price Variance	-10	Standard cost - PO price

If there is no change in the standard cost, the above entries will be reversed upon purchase order return.

Assuming that the standard cost has increased to $120, these accounting entries will be created for the purchase order return.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Cost Source
Cost Accounting	Return to Supplier	Inventory Valuation	-120	Standard cost
Cost Accounting	Return to Supplier	Receiving Inspection	120	Standard cost
Cost Accounting	Return to Supplier	Receiving Inspection	-20	Standard cost - PO price
Cost Accounting	Return to Supplier	Purchase Price Variance	20	Standard cost - PO price