Goods costing Rs. 20,000 are returned to a supplier by a sole trader. What is the effect of this transaction?
Correct answer: B. Purchase returns increase by Rs. 20,000
- A. Purchases increase by Rs. 20,000
- B. Purchase returns increase by Rs. 20,000
- C. Sales returns increase by Rs. 20,000
- D. Trade receivables increase by Rs. 20,000
Explanation
Goods returned to a supplier are purchase returns, also called returns outward. They reduce the cost of purchases and normally reduce the amount payable to the supplier.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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