Debtors & Creditors Quiz
ABC Traders return goods to XYZ Traders.
Which Document will ABC Traders will send to XYZ Traders?
A) Credit Note
B) Debit Note
Debtors & Creditors Quiz Explained –
ABC Traders returns goods that were purchased earlier, to its supplier XYZ Traders. This may be due to different reasons, however we are interested in how to document this event & the document that ABC Traders will send to XYZ Trader in this context.
At that time, when goods were sold by XYZ Traders, they have certainly issued an invoice to ABC Traders, that ABC Traders have recorded in their books of Accounts in XYZ Traders Account as payables to XYZ Traders ( a credit entry).
At the Time of Purchase, this was the double entry recorded by ABC Traders
Dr. Purchase $xxx
Cr. XYZ Traders $xxx
(Purchase of Goods from XYZ Traders, invoice#99 …)
Now ABC Traders have returned those goods, so it has to be documented & recorded as well.
Here it is important to note that ABC Traders is reducing the liability, it is obligated to pay earlier at the time of purchase from XYZ Traders.
Therefore ABC Traders has to issue a Debit Note to XYZ Trader, that will reflect as a debit entry in XYZ Trader Account (in the books of ABC Trader).
ABC Trader will make the following entry,
Dr. XYZ Traders $xxx
Cr. Purchase Return Account $xxx
(Return of Goods to abc XYZ Traders, issued debit note#123, …)
As a source document for accounting records, besides other documents like gate passes, ABC Trader will send a DEBIT NOTE to XYZ TRADER. XYZ Traders will then acknowledge this debit note & issue a credit note to ABC Traders.
Here as per the quiz, that which document will ABC Traders send to XYZ Traders, the correct answer is, ABC Trader will send Debit Note to XYZ Trader.