What is your replacement PO process? Example - A PO comes in that is damaged, we create an item receipt and bill as we have a bill associated to this PO. The vendor sends the product again but we can't track if we received the replacement because we can't create an item receipt (that was already received damaged previously) on a billed PO. What would be your process to deal with this?

Vendor return and new line on the original PO

That all works out from a inventory and accounting persective?

If you send them back to the vendor and receives a credit note from them, yes. Read about vendor returns and learn how they affect your GL first. Or do you just return new ones and your vendor let’s you keep the bad ones?