Damaged inventory and customer returns are a normal part of running a wholesale operation. The accounting treatment for each depends on what caused the problem and whether the product still has value.

When you discover damaged goods in your warehouse, you need to reduce your inventory asset and recognize the loss. For routine damage that happens during normal handling, storage, or transit, you debit Cost of Goods Sold and credit your inventory account. This treats the loss as a regular cost of doing business, which it is. If the damage is unusual or large in scale, like a flood or a major equipment failure that wipes out a significant amount of product, you should debit a separate expense account such as “Inventory Loss” or “Damaged Goods Expense” instead. Separating abnormal losses from COGS keeps your gross margin accurate so you can still see how your core business is performing.

If damaged goods still have some resale value at a reduced price, you do a write-down rather than a full write-off. Reduce the inventory value to whatever you can realistically sell it for and record the difference as a loss. A full write-off only makes sense when the product is completely unsalable.

Customer returns require a few more steps. Start by issuing a credit memo to the customer, which reverses the original sale on your books. Then you need to decide what happens to the returned product. If it’s in good condition and you can restock and resell it, add it back into inventory at its original cost. If it’s damaged or unsalable, write it off using the same approach described above. Don’t let returned goods sit in a gray area on your books. Process them promptly so your inventory counts and financial statements stay accurate.

In QuickBooks Online, you handle write-downs and write-offs through inventory adjustments. You can adjust both quantity and value, and QBO will create the journal entry for you. For returns, use the credit memo function to reverse the customer’s invoice, then adjust inventory accordingly. Make sure the accounts QBO posts to are correct. By default it may route adjustments somewhere you don’t want them, so check that the expense side hits COGS or your designated loss account.

Beyond getting the accounting right, track your return rates by product line and by customer. This is where inventory accounting becomes more than just recordkeeping. A high return rate on a specific product points to quality issues, packaging problems, or something going wrong in shipping. A high return rate from a specific customer could mean their expectations don’t match what you’re selling, or there’s a handling issue on their end. Either way, you can’t spot the pattern if you’re not tracking it.

Set up a simple system to log every return with the reason, the product, and the customer. Review it monthly. Wholesale margins are thin enough that a few percentage points of untracked shrinkage and returns can eat into your profit significantly. Our Orange County small business bookkeeping services help wholesale businesses keep clean inventory records and build reporting that makes these patterns visible before they become expensive problems.

The goal is not just to record what happened after the fact. It’s to use that information to reduce damage and returns over time, which directly protects your bottom line.