A firm using the perpetual inventory method returned defective merchandise costing $3,500 to one of its suppliers.The entry to record this transaction will include a debit to

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The firm is returning merchandise to one of its suppliers, therefore it must be recorded as a credit to accounts payable. The corresponding debit entry will be to Purchase Returns and Allowances, which is a contra account to purchases. This will reduce the amount of purchases and, in turn, reduce the cost of goods sold. The debit cannot be to accounts receivable or inventory since the firm is not receiving payment or keeping the defective merchandise.

A Firm Using the Perpetual Inventory Method Returned Defective Merchandise