Question

Assume the perpetual inventory method is used.

1.The company purchased $13,100 of merchandise on account under terms 4/10, n/30
2.The company returned $2,600 of merchandise to the supplier before payment was made
3.The liability was paid within the discount period
4.All of the merchandise purchased was sold for $20,200 cash
What effect will the return of merchandise to the supplier have on the accounting equation?
A. Total assets increase
B. Total assets decrease
C. Total liabilities increase
D. Total liabilities decrease

Answer 1

The return of merchandise to the supplier decreases total liabilities, because the accounts payable associated with the purchase of the merchandise is reduced.

Step-by-step explanation:

The return of merchandise to the supplier will affect the accounting equation by decreasing total liabilities. When the company returns merchandise, the accounts payable (a liability) associated with the purchase decreases because the company now owes less to the supplier for the items returned. The merchandise, an asset when held in inventory, is no longer part of the company's assets since it is returned. However, because the transaction is a return, and not a sale, this does not affect the cash or revenue numbers, and hence there is no impact on the assets. Instead, the total liabilities decrease by the amount of merchandise returned.