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

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

Options:

  1. Increase Assets, Increase Liabilities
  2. Decrease Assets, Decrease Equity
  3. Increase Assets, Decrease Equity
  4. Decrease Assets, Increase Liabilities

Correct Answer: Decrease Assets, Decrease Equity

Solution: 

A sales return decreases assets (accounts receivable or cash) and decreases equity (revenue), thus affecting the accounting equation.

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

Practice Questions

Q1
What is the effect of a sales return on the accounting equation?
  1. Increase Assets, Increase Liabilities
  2. Decrease Assets, Decrease Equity
  3. Increase Assets, Decrease Equity
  4. Decrease Assets, Increase Liabilities

Questions & Step-by-Step Solutions

What is the effect of a sales return on the accounting equation?
  • Step 1: Understand the accounting equation: Assets = Liabilities + Equity.
  • Step 2: Know that a sales return means a customer returns a product.
  • Step 3: Realize that returning a product decreases assets (cash or accounts receivable).
  • Step 4: Understand that revenue decreases when a sale is returned, which decreases equity.
  • Step 5: Conclude that both assets and equity decrease, keeping the accounting equation balanced.
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