Under a perpetual inventory system, when a credit customer returns merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

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Under a perpetual inventory system, both Sales Returns and Allowances and Merchandise Inventory need to be adjusted when a credit customer returns merchandise. Sales Returns and Allowances is debited and Accounts Receivable is credited to reflect the returned sale, while Merchandise Inventory is debited and Cost of Goods Sold is credited to reflect the return of the inventory.

Under a Perpetual Inventory System, When a Credit Customer Returns