Jul 5 A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

Question

Jul 5  A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

BlackTom AI · Accepted Answer

We start by identifying what happened: a sale occurred for $400 with cost of goods sold (COGS) of $200, and a customer returned the stock. This is effectively a reversal of the original sale and its associated cost.
Option a: Decrease by $400. This would imply the equity decreases by the full sale amount, but in a return, only the net effect on profit is reversed. The revenue impact is $400, but the cost impact is also reversed by $200, so the net effect is not a $400 decrease.
Option b: Increase by $400. A return cannot increase equity; it reduces both revenue (credit) and COGS (debit) when reversing the sale, so equity does not rise by $400.
Option c: Decrease by $200. This matches the net effect: the original $400 revenue is reversed (reducing income by $400) but the $200 cost is also reversed (increasing income by $200), yielding a net decrease of $200 in net income, which lowers Owner's Equity.
Option d: Increase by $200. An increase in equity would require a gain or positive net income, but the reversal of the sale reduces net income by $200 after accounting for the reversed revenue and COGS, so this option is incorrect.
In summary, the return reduces revenue by $400 and reverses COGS by $200, resulting in a net decrease to Owner's Equity of $200, which aligns with option c.

MUF0022 Accounting Unit 2 - Semester 2, 2025 Quiz: Returns of Stock

Jul 5 A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

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