Question

A company received a credit memorandum for $100 from a supplier for defective product returned. Using a periodic inventory system, this transaction would be recorded with a which of the following entries: 

Check all that apply. 

• credit to accounts payable 

• credit to purchases returns & allowances 

• debit to accounts payable 

• debit to purchases returns & allowances

Answer 1

Answer :

Credit to purchases returns and allowances

Debit to accounts payable

Explanation :

When a company receives credit memorandum from supplier, it means that the supplier in his books credited the company's account for returning the goods.

When it comes to company's books, before this credit memorandum purchase transaction has been recorded by debiting 'purchases account' and crediting 'accounts payable account'. Later, when goods are returned and the credit memorandum has been received from supplier for the confirmation of goods returned, purchase entry has to be reversed to the extent of $100.

Purchase entry would be reversed by debiting 'accounts payable account' and crediting 'purchases returns and allowance account'. Accounts payable account has to be debited as the liability of company reduced and 'purchases returns and allowances account' has to be credited as purchase expense reduced by returning goods.