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ACCA Applied Knowledge · Financial Accounting · Sales and purchases

Kestrel Ltd returns goods with a list value of $2,000 to a supplier, having originally bought them on credit. The return is fully accepted by the supplier and a credit note is received. Which entry correctly records this in Kestrel's ledgers?

Debit Trade payables and credit Purchase returns for $2,000. The return reduces the amount Kestrel owes the supplier, which is a debit to payables, and it reduces net purchases, which is recorded as a credit in the purchase returns account.

  1. ADebit Trade payables $2,000; Credit Purchase returns $2,000Correct
  2. BDebit Purchase returns $2,000; Credit Trade payables $2,000
  3. CDebit Trade receivables $2,000; Credit Purchase returns $2,000
  4. DDebit Purchases $2,000; Credit Trade payables $2,000

Explanation

Returning goods bought on credit reduces the amount owed to the supplier, so Trade payables is debited. The credit goes to Purchase returns (or purchases), which reduces the net cost of purchases. Option B reverses the entry and would increase the liability.

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