The return of merchandise was recorded as a debit to Accounts Receivable and a credit to Merchandise Inventory. This error will cause:
A) net income to be overstated.
B) net income to be understated.
C) total liabilities to be understated.
D) total assets to be overstated.

Question

Quizplus · Accepted Answer

The error of debiting Accounts Receivable instead of an expense or cost of goods sold account and crediting Merchandise Inventory (instead of reducing sales or accounts receivable directly) will lead to an overstatement of total assets. This is because Merchandise Inventory is increased (or not decreased) when it should have been, and Accounts Receivable is decreased (implying a collection of cash or reduction of revenue that didn't actually happen), which does not correct the overstatement of assets resulting from not reducing the inventory for the returned merchandise.

The Return of Merchandise Was Recorded as a Debit to Accounts