Issue a negative Purchase Order. Otherwise you will have to enter an inventory adjustment.

Does the credit note get posted against the negative PO?

Any suggestions on how to handle serialized items returned to the vendor? Issuing a negative PO doesn't remove the serial number??

A negative PO doesn't work for serialized items, it doesn't remove the serial number from our inventory records. An Inventory adjustment doesn't provide a paper trail for the vendor that is getting the inventory back.

We had to invoice the vendor for the items being returned - is there a better/correct way to do this.

after you issue the negative po go back to it and enter the negative number into the received box, the serial box should pop up after you press tab, then you can pick which serial is being returned.