We either post a partial return of the good items - partial credit, or return all for full credit, then do an inventory adjustment to take the the scrapped items out.

You could make a bin called SCRAP and return stuff directly to the bin. Then you could check the balance in the SCRAP bin at the end of each month to make sure you didn't forget to move the stuff out of inventory.

Thanks guys.  So it looks like the answer for both of you involves doing manual inventory adjustments.  Meaning you do a customer return and put the items in a certain bin, even if in real life you've put the items in the dumpster, and then you have to manually adjust them out periodically.  

Surely there's a better way and Sage doesn't force you to add something to inventory, when in reality it's physically not being added to inventory....or is this the only way?   Manual inventory adjustments....every business that uses Sage has to to a work-around and just manually take items out of a scrap bin?    

(PS thanks for the input and the help!)

You can just issue a manual credit against the invoice in AR and not worry about the inventory, but you will not have a true net sales quantity for your item history.  Unfortunately, returning for credit or replacement means returning the inventory item in MAS 500.  If you don't care about the item history, want to avoid the extra transactions, and just want to give the customer credit, then just process the credit memo in AR.  If you want to see the true history of the item, I recommend doing as the others suggest, returning inventory to a SCRAP bin.  Additionally I would suggest making that bin inventory NOT AVAILABLE for any replenishment calculations and just wipe all the inventory out of that bin using Process Physical Count, setting each item quantity to zero on the last day of each period.   This will save you from doing one inventory transaction for every return.  Hope this helps.