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ACCA Applied Knowledge · Financial Accounting · Receivables and payables

Kestrel Ltd issues a credit note to a customer for goods returned. The original sale was $2,000 net plus sales tax at 10%. Which entry is correct?

Debit sales returns $2,000 and sales tax payable $200, and credit receivables $2,200. The credit note reverses the original sale, so both the net revenue and the sales tax liability are reduced, and the customer owes $2,200 less.

  1. ADr Sales returns $2,000; Dr Sales tax payable $200; Cr Receivables $2,200Correct
  2. BDr Sales returns $2,200; Cr Receivables $2,200
  3. CDr Receivables $2,200; Cr Sales returns $2,000; Cr Sales tax payable $200
  4. DDr Sales returns $2,000; Cr Receivables $2,000

Explanation

The return reverses the original sale: the net $2,000 goes to sales returns and the $200 tax reduces the liability to the tax authority. The customer's receivable falls by the gross $2,200. Debiting returns with $2,200 overstates returns and leaves the tax liability unchanged.

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