Basic Journal Entry Question:
Capital + Purchase Returns

Q: Write the journal entries for the following transactions:

Jan 1 Shayam commenced business with cash $15,000.
Jan 10 Returned goods to Krishna $350.


A: The journal entries for the above are as follows:

Jan 1:
Debit: Bank...........$15,000
Credit: Capital..................$15,000
$15,000 invested by owner

The first transaction is a typical double entry for capital, which is the investment of assets in a business by the owner.

Since the cash is an asset and this is increasing, it is debited.

Since owner's equity (the owner's share of the assets) is also increasing, this is credited.

Here's the journal entry for the returned goods:

Jan 10:
Debit: Accounts Payable....................$350
Credit: Purchases returns.........................$350
Goods returned

In the second entry above I have assumed that the goods were purchased by Shayam (the business owner) from Krishna (some other businessman). So these returns are purchase returns for Shayam.

I also assumed the goods were originally purchased on credit (not paid in cash). So the debit here was not to cash or bank (money refunded) but rather to accounts payable (a liability or debt account).

The original entry for the purchase should have been:

Debit: Purchases....................$350
Credit: Accounts Payable.................$350
Goods purchased on credit

Purchases is an expense and so is debited here. And the credit is to accounts payable, which is the liability account (debt).

Note that we don't credit purchases when we do a return, we credit a separate account called purchases returns.

Did I get those journal entries right? What do you think? Add your say in the comments below...

Best,
Michael Celender
Founder of Accounting Basics for Students


Related Questions & Tutorials:

• Journal Entry for Purchasing Goods (Perpetual vs Periodic)?
• Purchase Returns Journal Entry?
• Accounts Payable Journal Entries Tutorial

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