Music, Inc. uses a periodic inventory system when recording its purchases and sales of inventory. If the business returns $1,000 of damaged goods to its supplier, select the correct entry to record the return:

Question

Quizplus · Accepted Answer

The correct entry to record the return of damaged goods under a periodic inventory system is to credit (reduce) the Accounts Payable account, which reflects the reduction in the amount owed to the supplier, and debit (increase) the Purchases Returns and Allowances account, which offsets the original purchase. Option A is incorrect because it debits (increases) Purchases Returns and Allowances instead of crediting it; Option B is incorrect because it debits (increases) Merchandise Inventory, which would only be suitable under a perpetual inventory system; Option D is incorrect because it would increase the Purchases account, which would overstate the cost of goods sold.