Question

X-Mart uses the perpetual inventory system to account for its merchandise. A customer who purchased merchandise on account requested an allowance on merchandise purchase due to its poor quality, but did not return the goods back to X-Mart. Assuming that X-Mart gives an allowance of $50 on the merchandise, demonstrate the required journal entry on X-Mart's books to record the allowance.

a. Debit Sales Returns and Allowances $50
b.Credit Account Receivable $50
c.Both a & b
d.None

Answer 1

The answer is: C) Both a & b

Step-by-step explanation:

Sales Returns and Allowances account is a contra-revenue (the opposite of revenue), and when contra-revenue increases, it should be debited.

Accounts Receivable account is an asset, and when assets decrease, they should be credited.

• Dr Sales Returns and Allowances account $50
• Cr Accounts Receivable $50