Explanation:

Returns inwards are goods returned to the selling entity by the customer, such as for warranty claims or outright returns of goods for a credit. For the customer, this results in the following accounting transaction:

• A debit (reduction) of accounts payable
• A credit (reduction) of purchased inventory

Returns inwards do not necessarily result in a reduction of the cost of goods sold, since goods that were returned might not necessarily have been sold to third parties during the accounting period. Returns inwards may not involve goods intended for sale by the buyer at all - they may instead be fixed assets or items intended to be consumed internally and charged to expense. If so, returns inwards may also result in a reduction of a fixed assets account, or an administrative expense.