Return to Vendor (RTV): Process, Debit Memo and Journal Entries

Every purchasing team returns goods. A wrong revision arrives, a batch fails inspection, the supplier ships 120 units against an order for 100. The physical part is simple: pack the goods and send them back. The accounting part is where returns go wrong, because a return touches three ledgers at once — inventory, the GRNI accrual and accounts payable — and the right entry depends on whether the supplier has already invoiced.

What is a return to vendor?

A return to vendor (RTV) is the process of sending purchased goods back to the supplier and recording the reduction of inventory and of the amount owed to that supplier. It is also called a purchase return, a vendor return or a return to supplier. The supplier usually authorizes it first with a return merchandise authorization (RMA) number.

A return is not a correction of the receipt. If the warehouse booked 120 units when 100 arrived, the receipt itself was wrong and is corrected, as described in goods receipt accounting. A return starts from a receipt that was right: the goods really arrived, and now some of them go back. Keeping the two apart keeps the receipt history and the supplier's delivery record honest.

Return, allowance or replacement

A supplier can settle a problem with goods in three ways, and each one is recorded differently.

“Purchase returns and allowances” is the textbook name for the first two together. In a periodic inventory system they are collected in one contra-purchases account. In a perpetual system, which every ERP runs, they go straight to inventory or to the GRNI accrual, as the example below shows. The perpetual vs periodic inventory guide explains why the two systems post the same event differently.

How the return value is calculated

Value leaving inventory = returned quantity × unit cost on the original receipt
Debit memo amount       = returned quantity × invoiced unit price + tax on it

When the invoice price equals the order price, the two numbers are the same and the return clears cleanly. When they differ, the gap is a price difference, not part of the return, and it belongs where the original difference went — see purchase price variance.

Our example: 10 units that fail inspection

Purchase order PO-4471 orders 100 units of component CP-310 from supplier S-212 at €12.00 per unit. All 100 arrive and are received into stock:

Quality inspection then finds 10 units with the wrong firmware revision. S-212 agrees to take them back and issues RMA-7730. What happens next depends on one question: has the supplier invoice been posted yet?

Case 1: return before the supplier invoice

The 10 units leave the warehouse before the invoice arrives. The return reverses part of the receipt accrual:

GRNI now holds €1,080 for the 90 units that stayed. S-212 invoices exactly those 90 units:

GRNI is back to zero and accounts payable shows €1,080. No debit memo is needed, because the supplier never billed the returned units. The three-way match works on net quantities: ordered 100, received 100 less 10 returned, invoiced 90.

Case 2: return after the supplier invoice

This time S-212's invoice for all 100 units was matched and posted before inspection finished:

The goods leg of the return is the same entry as in case 1:

GRNI now shows a debit of €120. That balance means “returned, not yet credited”. The buyer sends S-212 debit memo DM-0031 for €120, quoting the invoice, the receipt and RMA-7730. When S-212 confirms with its credit note, accounts payable is reduced:

Many textbooks show a purchase return as one line: debit accounts payable €120, credit inventory €120. That is the same result in one step, and it is correct when the goods and the credit move together. Splitting it through GRNI is what an ERP needs, because the warehouse ships the goods and accounts payable records the credit on different days, often weeks apart. The GRNI debit is the bridge between those two days, and it shows up on the GRNI report until the credit arrives.

With VAT on the invoice

If S-212 charged 20% VAT, the original invoice was €1,440 and the credit for 10 units is €144. The input VAT claimed on the invoice comes back with the credit:

Debit memo vs credit memo

A debit memo and a credit memo describe the same return from opposite sides of the trade. The buyer issues the debit memo: it debits the supplier's account in the buyer's books, which reduces what the buyer owes. The supplier issues the credit memo, or credit note: it credits the buyer's account in the supplier's books. In some countries the buyer's document is called a debit note.

The rule that matters: the buyer posts the reduction once. Some companies post it when they send the debit memo and then only match the supplier's credit note to it. Others post nothing until the credit note arrives. Either works. Posting both is the most common return error, and it shows up later as a difference in vendor reconciliation.

Return to vendor process, step by step

1. Identify the problem. Inspection, a production stop or a customer complaint shows that some received units cannot be used. Move them to a blocked or quarantine location so nobody picks them. If a whole batch is affected, lot tracking shows which other units came from it and who already has them.
2. Get the supplier's authorization. Request an RMA number and agree the settlement: credit, replacement or allowance.
3. Create the return document. Reference the purchase order and the receipt line, not just the item. The reference is what carries the receipt cost.
4. Ship the goods. Posting the shipment reduces inventory and debits GRNI.
5. Issue the debit memo if the invoice was already posted. Quote the invoice, the receipt, the quantity, the invoiced unit price, the tax and the RMA number.
6. Match the supplier's credit note to the debit memo, or post it if the debit memo was not posted.
7. Apply the credit. Offset it against the original invoice or the next payment, or record the refund if the invoice was already paid.
8. Check the GRNI report. A return that is still a GRNI debit after 30 days is a credit the supplier has not given yet.

Steps 4 to 7 are the second half of the purchase-to-pay process run backwards: goods out instead of in, and a credit instead of an invoice.

Returns under moving average cost

The formula said the returned units leave at the receipt cost. Here is why that matters. Before PO-4471 arrived, CP-310 already had 400 units in stock at €11.00, so the receipt changed the moving average cost:

If the return had left stock at the current average of €11.20, inventory would drop by only €112 while the supplier credits €120. The missing €8 would sit in GRNI with nothing left to clear it, or someone would write it off by hand. Returning at the receipt cost credits exactly what the receipt debited, and the average for the units that stayed is recalculated from there.

Under FIFO the same rule applies to layers: the returned units come out of the layer created by the receipt they belong to, not out of the oldest layer.

Replacement instead of credit

Suppose S-212 ships 10 correct units instead of crediting the invoice. The invoice for 100 stays as it is. The return posts the same goods leg as in case 2 (debit GRNI €120, credit inventory €120), and the replacement receipt reverses it:

GRNI is back to zero, inventory holds 100 good units at €1,200, and accounts payable still owes €1,200 for 100 good units. No debit memo, no credit note. The replacement must be received against the original order or RMA, not as a new purchase, or it will wait for an invoice that never comes.

Controls for vendor returns

• No return without a receipt reference. The return document points to the receipt line it reverses, so the cost, the order and the supplier come from the record, not from memory.
• Two roles. The warehouse ships the goods. Accounts payable records the credit. Neither does both.
• A payment hold on invoices with an open return. Paying €1,200 while a €120 credit is still pending turns a credit into a collection job.
• An aging report of returned, not credited. The GRNI debits from returns, by supplier and age.
• One posting per return. The debit memo and the credit note are matched, never both posted.
• A reason code of its own. “Vendor return” is not an inventory adjustment. An adjustment changes the count and posts to shrinkage. A return reverses a purchase.

Common return to vendor mistakes

1. Booking the return as a negative adjustment. Stock is right, but GRNI keeps €120 that nothing will clear and the supplier never learns about the claim.
2. Posting the debit memo and the credit note. Accounts payable drops by €240 for a €120 return.
3. Returning at the average cost. The €8 gap in the example lands in GRNI.
4. Forgetting the VAT. The credit is €144, not €120, when the invoice carried 20% VAT.
5. Reversing a correct receipt. The goods did arrive. Deleting the receipt hides a supplier quality problem behind a delivery that looks short.
6. Paying the full invoice while the credit is pending. The credit then has to be collected or carried as a debit balance on the supplier.
7. Receiving the replacement as a new purchase. It creates a GRNI accrual for an invoice that will never arrive.

How Gruvero approaches vendor returns

Gruvero posts the goods receipt to inventory and GRNI, and an invoice matched to that receipt clears GRNI against accounts payable. A vendor credit note is tied to the source invoice and to its receipt lines. Posting it debits accounts payable, reverses the input tax and credits GRNI, and the credit note becomes an open item in accounts payable that is offset against the invoice it settles. Vendor return and vendor replacement receipt are separate inventory reason codes, apart from adjustments, in the procurement ERP.

On the roadmap: a return-to-vendor document that ships the goods back against the receipt line, posts the goods leg to GRNI and inventory at the receipt cost, and links the return to its credit note. Until then, the goods leg is recorded with the vendor return reason and the credit note carries the payable side in the accounting ERP.

FAQ

What is a return to vendor (RTV)?

A return to vendor is sending purchased goods back to the supplier, usually under an RMA number, and recording the reduction of inventory and of the amount owed. It is also called a purchase return or vendor return.

What is the journal entry for a purchase return?

In a perpetual system the full entry is debit accounts payable, credit inventory. In an ERP that uses GRNI it is split in two: debit GRNI, credit inventory when the goods leave, then debit accounts payable, credit GRNI when the credit is recorded. In the example both give €120 less inventory and €120 less payable.

What is a debit memo in accounts payable?

A debit memo is the document a buyer sends a supplier to claim a reduction of what it owes, for returned goods or a price error. It debits accounts payable. The supplier normally answers with a credit memo, and the buyer posts the reduction only once.

What is the difference between a debit memo and a credit memo?

The buyer issues the debit memo and the supplier issues the credit memo. Both describe the same reduction of the buyer's payable, seen from each side of the trade.

Is a debit note the same as a debit memo?

Yes. “Debit note” is the name used in many countries for the buyer's document, and “debit memo” is the common US name.

What are purchase returns and allowances?

They are the textbook name for returned goods and price reductions on goods the buyer keeps. In a periodic system both are credited to a purchase returns and allowances account. In a perpetual system the return is credited to inventory and the allowance to inventory or cost of goods sold, depending on whether the goods are still in stock.

Does a return to vendor reduce inventory?

Yes. Inventory falls by the cost on the original receipt. In the example it is 10 × €12.00 = €120, even though the moving average of the item was €11.20 on the day of the return.

What happens if the supplier never sends a credit note?

The return stays as a debit on GRNI, or as an open debit memo, until the supplier settles it. Age those balances, follow up with the RMA number and settle them in the vendor reconciliation. They are money the supplier owes back.

Conclusion

A return to vendor is a purchase run backwards, and the entries should look like it. Goods leave at the cost they came in at. GRNI carries the gap between the day the warehouse ships and the day accounts payable records the credit. The debit memo and the supplier's credit note reduce the payable once, not twice. In the example, 10 units of CP-310 leave stock at €120, GRNI holds €120 until DM-0031 is confirmed, and S-212's balance ends at €1,080 — with every number traceable to PO-4471, the receipt and RMA-7730.