During July 2025, the following goods were returned by credit customers of Obi Trading. Date Credit Note No Customer Amount ($) Reason July 4 CN 51 K Sharma...
Question 1 Report
During July 2025, the following goods were returned by credit customers of Obi Trading.
| Date | Credit Note No | Customer | Amount ($) | Reason |
|---|---|---|---|---|
| July 4 | CN 51 | K Sharma | 280 | Goods damaged |
| July 9 | CN 52 | M Tan | 150 | Wrong items sent |
| July 15 | CN 53 | R Patel | 420 | Overcharged |
| July 22 | CN 54 | K Sharma | 180 | Faulty goods |
| July 28 | CN 55 | S Wong | 260 | Goods not as ordered |
(a) Prepare the sales returns day book for July 2025. [6]
(b) Prepare the sales returns account in the general ledger. [2]
(c) Post the entries to the individual accounts in the sales ledger. [5]
(d) State two effects on the financial statements of recording sales returns. [4]
(e) Explain why a credit note is issued when goods are returned by a customer. [3]
Answer Details
(a) Sales Returns Day Book - July 2025
The sales returns day book records goods returned by credit customers. Each entry is supported by a credit note issued by the business.
| Date | Credit Note No | Customer | Amount ($) |
|---|---|---|---|
| Jul 4 | CN 51 | K Sharma | 280 [1] |
| Jul 9 | CN 52 | M Tan | 150 [1] |
| Jul 15 | CN 53 | R Patel | 420 [1] |
| Jul 22 | CN 54 | K Sharma | 180 [1] |
| Jul 28 | CN 55 | S Wong | 260 [1] |
| Total | 1 290 [1] | ||
(b) General Ledger - Sales Returns Account
| Date | Details | Debit ($) |
|---|---|---|
| Jul 31 | Sales Returns Day Book | 1 290 [1] |
The total is posted to the debit side of the sales returns account in the general ledger. [1] Sales returns is a debit entry because it reduces revenue.
(c) Sales Ledger - Individual customer accounts
Each return is posted to the credit side of the customer's account in the sales ledger, reducing what they owe.
| Account | Date | Details | Credit ($) |
|---|---|---|---|
| K Sharma | Jul 4 | Sales returns | 280 [1] |
| Jul 22 | Sales returns | 180 [1] | |
| M Tan | Jul 9 | Sales returns | 150 [1] |
| R Patel | Jul 15 | Sales returns | 420 [1] |
| S Wong | Jul 28 | Sales returns | 260 [1] |
(d) Two effects on the financial statements
- Income statement: Revenue (turnover) is reduced by sales returns, which in turn reduces gross profit. [1] Since gross profit is lower, net profit is also reduced by the same amount. [1]
- Statement of financial position: Trade receivables are reduced because the customers owe less after the returned goods are credited to their accounts. [1] [1]
(e) Why a credit note is issued
A credit note is a document sent to the customer acknowledging that goods have been returned and authorising a reduction in the amount they owe. [1] It reduces the customer's balance in the sales ledger. [1] The credit note serves as the source document for recording the transaction in the sales returns day book. [1]
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