What is the effect of a purchase return on inventory?

• A. Increases inventory and increases accounts payable.
• B. Decreases revenue and increases cash.
• C. Decreases inventory and either accounts payable or cash.
• D. Increases cash and records a gain on sale.

Answer: (C)

A purchase return reverses part of a previous purchase, so it reduces the inventory asset. The other side of the entry depends on how you originally paid. If the purchase was on credit, returning the goods reduces the Accounts Payable liability (you debit Accounts Payable) and also reduces Inventory (credit Inventory). If the purchase was paid in cash, returning the goods refunds cash to you (Cash increases) and reduces Inventory (credit Inventory). Revenue isn’t affected by purchases or their returns—the impact is on assets and, if applicable, on liabilities or cash. So the effect is a decrease in inventory and a change in either accounts payable or cash, depending on the original payment method.