Introduction to Accounting

Solution 3
QUESTION 1
State the TWO (2) reasons for increase in inventory and decrease in inventory.

TWO (2) reasons for increase in inventory

1) Purchase of inventory
2) Sales return/ return inwards

TWO (2) reasons for decrease in inventory

1) Sales of inventory
2) Purchase return/ return outwards

QUESTION 2
Explain the use of debit notes and credit notes.

Debit note is a document prepares by business and send to supplier when the
business return goods to supplier (known as purchase return/ return outwards) due
to damage or wrong items. This is to show the reduction in account payable by
debited the goods return amount.

Credit note is a document prepares by business and issue to

customers/debtors when customers/debtors return goods to business (known as
sales return/ return inwards). This is to show the reduction amount in account
receivable by credited the goods return amount.

QUESTION 3
State the effect of the following transactions:

No. Transactions Effect

Example: Example:
1 Purchase goods using cash Increase in purchase
Decrease in cash
Increase in purchase
2 Purchase goods paying by cheque
Decrease in bank
Increase in purchase
3 Purchase goods from supplier on credit
Increase in account payable
Increase in sales
4 Sales of goods by cash
Increase in cash
5 Received a cheque when make a sale Increase in sales
 Increase in bank
Increase in sales
6 Sold goods on credit to customers
Increase in account receivable
Decrease in cash/bank
7 Make a payment to creditors
Decrease in account payable
Increase in cash/bank
8 Receive payment from debtors
Decrease in account receivable
Increase in purchase return
Return goods to credit supplier due to
9 Decrease in account payable
wrong items received
Credit customer return goods and issue a Increase in sales return
10
debit notes to business Decrease in account receivable