Accounting Q&A · Financial Accounting · Topic 11
A shop buys merchandise on credit and pays cash for stationery. Learn where each transaction goes and how to trace the resulting ledger postings.
25 short-answer questions. Try each question before revealing the answer.
Worked example
A retailer buys 600 of resale goods on credit and returns 100. In a traditional system, record 600 in the purchases book and 100 in the purchases returns book. The supplier balance is 500 before any payment.
Choosing the right book
1. What are subsidiary books?
Books of original entry that group recurring transactions by type before posting to the ledger.
2. Why are subsidiary books used?
They divide recording work, make similar transactions easier to review and provide totals that can simplify ledger posting.
3. How does a subsidiary book differ from a subsidiary ledger?
A subsidiary book records transactions by type. A subsidiary ledger groups postings by customer, supplier or another individual account.
4. What belongs in the purchases book?
In the traditional format, record credit purchases of goods held for resale.
5. Where is a cash purchase of resale goods recorded?
Record the payment in the cash book or cash payments journal. Apply the business’s inventory accounting policy when posting.
6. Where is office furniture bought on credit recorded?
In a traditional system with a merchandise-only purchases book, record it in the journal proper. Debit Furniture and credit the supplier.
7. What belongs in the sales book?
Credit sales of goods held for resale in the traditional format. Use sales invoices as supporting records.
8. Where does a cash sale of merchandise go?
Record it in the cash book or cash receipts journal. Under perpetual inventory, also record the cost of the goods sold.
9. Where does a credit sale of old equipment go?
In the journal proper or the business’s designated disposal journal. Record the receivable and account for the asset disposal.
Returns and ledger posting
10. What is the purchases returns book?
It records merchandise returned to suppliers from credit purchases. It is also called the returns outward book.
11. What is the sales returns book?
It records merchandise returned by customers from credit sales. It is also called the returns inward book.
12. Which document can support a supplier return?
A supplier credit note can confirm the reduction in the balance. Match it to the original invoice and the return record.
13. Which document usually confirms a customer’s credit for returned goods?
A credit note issued to the customer, linked to the original sale and the reason for the return.
14. Three credit merchandise purchases total 420, 680 and 300. What is the total?
1,400. Under a periodic system, debit Purchases for that total and credit the relevant payables accounts through the posting procedure used.
15. A business returns 150 of inventory originally bought on credit. What is the periodic-system entry?
Debit Accounts Payable 150 and credit Purchases Returns 150, assuming the supplier accepts the return.
16. What is the equivalent entry under a perpetual inventory system?
Debit Accounts Payable 150 and credit Inventory 150, assuming the return reverses that amount of inventory cost.
17. A customer returns 90 of goods bought on credit. How is the selling price reversed?
Debit Sales Returns and Allowances 90 and credit Accounts Receivable 90. Under perpetual inventory, also restore the inventory at its recorded cost if appropriate.
Bills and the journal proper
18. What does the bills receivable book record?
Details of accepted bills the business holds, including the party, amount and maturity date.
19. How is a 500 bill received from an existing customer recorded?
If the bill replaces the customer’s existing debt, debit Bills Receivable 500 and credit Accounts Receivable 500.
20. What does the bills payable book record?
Details of bills accepted by the business, including the payee, amount and due date.
21. How is a 500 bill accepted in place of an existing supplier balance?
Debit Accounts Payable 500 and credit Bills Payable 500.
22. What is the journal proper?
The general journal used for entries that do not fit the other books, such as opening, adjustment and correction entries.
23. Where is an end-of-period depreciation adjustment recorded?
In the journal proper in a traditional system. Debit Depreciation Expense and credit Accumulated Depreciation.
24. How do you check that a credit sales invoice was recorded once?
Trace its unique invoice number to the sales book, customer ledger and control account postings. Investigate duplicate numbers or missing entries.
25. What three questions help you choose the correct subsidiary book?
Ask what happened, whether it was cash or credit, and whether it involved merchandise or another item. Then check the business’s journal rules.