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What is the effect of a purchase return on the accounting equation?

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Question: What is the effect of a purchase return on the accounting equation?

Options:

  1. Increases assets and decreases liabilities
  2. Decreases assets and decreases expenses
  3. Decreases assets and decreases liabilities
  4. Increases liabilities and decreases equity

Correct Answer: Decreases assets and decreases expenses

Solution: 

A purchase return decreases assets (inventory) and decreases expenses, as it reduces the cost of goods sold.

What is the effect of a purchase return on the accounting equation?

Practice Questions

Q1
What is the effect of a purchase return on the accounting equation?
  1. Increases assets and decreases liabilities
  2. Decreases assets and decreases expenses
  3. Decreases assets and decreases liabilities
  4. Increases liabilities and decreases equity

Questions & Step-by-Step Solutions

What is the effect of a purchase return on the accounting equation?
  • Step 1: Understand what a purchase return is.
  • Step 2: Identify that returning items decreases inventory.
  • Step 3: Recognize that a decrease in inventory means a decrease in assets.
  • Step 4: Understand what Cost of Goods Sold (COGS) is.
  • Step 5: Realize that returning items decreases expenses related to COGS.
  • Step 6: Conclude that both assets and expenses decrease, keeping the accounting equation balanced.
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