When you want to return an order, go to the orders' page and click Return order.
After all needed information is in place save the return by clicking Create.
All returns are found on Returns page. There you can easily see the status of all returns.
When the status changes to RECEIVED, the products have arrived to the warehouse.
When the status changes to INSTOCK, the products are on the shelf and ready to be ordered again.
On the Returns page, you can see the received count.
If you want to receive notifications when an order is returned, read more about email notifications.
Returns report lists all the shipped and returned products from given time period. You can access it from Misc → Custom reports.
Select Returns report and desired time period, then click Email selected reports.
More on other reports HERE.