Master Debits and Credits Accounting Quiz

This is a purchase on account, so inventory increases and a liability is created. Debit Inventory for 1,650 because the calculators are an asset that will be sold later. Credit Accounts Payable for 1,650 because payment is owed to the supplier under n/30 terms. No cash is paid immediately, so Cash is not credited. This follows the perpetual inventory approach for merchandising.

Freight-in is part of the cost to bring inventory to a sellable condition. Since the buyer paid 50, the inventory cost should increase by 50. Debit Inventory 50 and credit Cash 50. Recording it as an expense would understate inventory and overstate expenses. The calculation is direct: inventory cost becomes 1,650 + 50 minus any returns later.

A purchase return reduces what you owe the vendor and reduces inventory. The credit from the vendor is 66, so debit Accounts Payable 66 to lower the liability. Credit Inventory 66 because the returned goods are no longer owned. If Inventory had been 1,650 + 50 before returns, the net inventory after this return drops by 66.

A credit sale increases Accounts Receivable and Sales Revenue for 690. Separately, you must record the cost side: debit Cost of Goods Sold 520 and credit Inventory 520. This matches expense to revenue. Profit on the sale is 690 − 520 = 170, but profit is not recorded directly; it results from the two entries.

Sales returns reduce revenue and reduce what the customer owes. Debit Sales Returns and Allowances 45 and credit Accounts Receivable 45. Because the item returns to inventory, debit Inventory 34 and credit Cost of Goods Sold 34. Notice the two values differ: 45 is selling price, 34 is cost. The gross margin reversed is 45 − 34 = 11.

This is a credit sale for 760 with cost 570. Record revenue side: debit Accounts Receivable 760 and credit Sales Revenue 760. Record cost side: debit Cost of Goods Sold 570 and credit Inventory 570. The implied gross profit is 760 − 570 = 190. Options that debit Inventory for 760 confuse selling price with cost and are incorrect.

Amount owed after the return is 1,650 − 66 = 1,584. Paying the vendor reduces the liability and cash. Debit Accounts Payable 1,584 and credit Cash 1,584. Freight was already paid in cash and is separate from what is owed to the vendor. This entry settles the net payable balance created by the purchase and reduced by the return.

When the customer pays the invoice, cash increases and accounts receivable decreases. Debit Cash 690 and credit Accounts Receivable 690. This does not change Sales Revenue because the sale was recorded earlier. It also does not affect inventory because inventory and COGS were recorded at the time of sale, not when cash is collected.

Freight-in is a product cost, not a period expense, under merchandising accounting. It gets added to inventory because it is necessary to acquire the inventory for sale. If it were expensed, COGS and gross profit would be distorted across periods. Conceptually: total inventory cost = purchase price + freight-in − returns − discounts (if applicable).

A customer return affects both the revenue side and the cost side. The seller records Sales Returns (or Sales Returns and Allowances) to reduce net sales and reduces Accounts Receivable or Cash depending on the refund method. Then the seller reverses the cost by increasing Inventory and decreasing Cost of Goods Sold for the item’s cost. This restores inventory and removes the previously recognized expense.