How to record a sales return: entries for income, tax and inventory

The accounting behind it

A sale of stock posts two pairs of lines: income and tax against the customer, and the item's cost from inventory into cost of goods sold. A return has to undo both, or your margin and stock count will be wrong.

The income side uses the selling price. The inventory side uses cost, not price, so the two halves of the entry have different amounts.

Damaged returns that you can't resell shouldn't go back into sellable stock at full cost. Put them back and write them down, or record the loss straight away (see inventory shrinkage).

Reverse the sale
Account	Debit	Credit
Sales income	Price
Sales tax payable	Tax
Accounts Receivable (customer)		Price + tax

Restock at cost
Account	Debit	Credit
Inventory Asset	Cost
Cost of Goods Sold		Cost

Worked example: two lamps come back

You sold three lamps at $80.00 each plus 8% sales tax. Each cost you $45.00. The customer returns two. The credit memo is $160.00 plus $12.80 tax, and $90.00 of cost goes back into inventory.

Gross profit on the sale drops from $105.00 to $35.00, which is right: only one lamp is sold now.

Credit memo
Account	Debit	Credit
Sales Income	$160.00
Sales Tax Payable	$12.80
Accounts Receivable		$172.80
Inventory Asset	$90.00
Cost of Goods Sold		$90.00

Common mistakes

Using Adjust Inventory to put the items back. That fixes the count but leaves the sale and the tax in place.
Restocking at selling price instead of cost, which inflates inventory.
Restocking damaged goods at full value.
Taking a return after a long time without checking your return policy and the tax time limits for adjusting the return.

In the US and in Canada

United States

States generally let you take refunded sales off taxable sales when you have refunded the tax to the customer, but the method and time limits are set by each state.

Canada

Issue a credit note showing the GST/HST adjusted; the CRA's rules on credit notes apply (four years to make the adjustment in most cases). If you charge a restocking fee, that fee is a taxable supply in its own right.

In AcboBooks

In AcboBooks 0.2.1 a credit memo with inventory items does both halves: it reverses the income and tax and restocks the items at their current average cost.

Open Credit Memos. Go to Customers → Credit Memos and choose the Customer, Date and Ref #.
Add the returned items. Add each returned item with the quantity returned and the price you charged, and pick the same tax rate as the sale.
Save. Click Save Credit Memo. The items go back into stock and the customer has a credit.
Refund or apply. In Recent credit memos, click Refund to pay the customer back, or Apply to set the credit against an open invoice.

Check the result under Reports → Stock Status or Inventory Valuation.

Menu names are from AcboBooks 0.2.1. Not using it yet? Try it free for 15 days, with the sample company to practise on.

Questions

What cost goes back into inventory?

The item's cost, not its selling price. AcboBooks uses average cost, so returns go back at the item's current average cost.

What if the returned item is damaged?

Record the return so the sale and tax are reversed, then use Adjust Inventory to write the item down or off to an expense or cost of goods sold account.

Can I charge a restocking fee?

If your policy says so. Credit the customer for the price less the fee; the fee stays as income. In Canada the fee is generally subject to GST/HST.

Related how-to guides

Terms used here

More on this site

Sources

CRA GST/HST Memorandum 12-2: credit and debit notes

Updated October 25, 2026. General bookkeeping information, not tax, legal or accounting advice. Rules differ by state and province and change over time; check with the IRS, the CRA or your accountant for your own situation.

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