Understanding the Journal Entry for Purchase Return and Payment

This problem requires us to record a journal entry for a business transaction involving returning goods to a supplier (Mr. B) and making a cash payment in full settlement of an amount owed. Let's break down the transaction and the accounts involved.

Analyzing the Transaction Details

The transaction involves the following:

• Original purchase amount from Mr. B: Rs. 5,000. This means Mr. B was initially credited with Rs. 5,000 (as a creditor).
• Goods returned to Mr. B: Rs. 500. This is a Purchase Return (or Return Outwards). When goods purchased are returned, the amount owed to the supplier decreases. Purchase Return is credited as it reduces the cost of purchases. The liability to Mr. B also decreases, so Mr. B's account is debited.
• Amount paid to Mr. B: Rs. 4,000. Cash is paid out, so Cash A/c will be credited.
• Payment is made "in full settlement for buying goods worth Rs. 5,000". This phrase indicates that the total original liability of Rs. 5,000 is being cleared by this set of actions (return + payment).

Calculating the Discount Received

The original amount owed was Rs. 5,000. After returning goods worth Rs. 500, the net amount payable to Mr. B was Rs. 5,000 - Rs. 500 = Rs. 4,500. However, only Rs. 4,000 was paid in full settlement. This means that Mr. B allowed a discount for prompt or lump-sum payment.

Discount Received = Net amount payable - Amount paid

Discount Received = Rs. 4,500 - Rs. 4,000 = Rs. 500.

Discount Received is an income for the business, and incomes are credited.

Applying Debit and Credit Rules

We need to pass a single journal entry to record the settlement of the original liability of Rs. 5,000. This entry will extinguish the original credit balance in Mr. B's account.

• Mr. B's Account: Mr. B is a creditor. To reduce or extinguish the liability to a creditor, the creditor's account is debited. Since the full original liability of Rs. 5,000 is being settled, Mr. B's Account will be debited with Rs. 5,000.
• Cash Account: Cash is going out of the business. Cash is an asset, and a decrease in asset is credited. So, Cash A/c will be credited with Rs. 4,000.
• Return Outwards Account: Goods are being returned. This reduces purchases. Return Outwards is credited. So, Return Outwards A/c will be credited with Rs. 500.
• Discount Received Account: This is an income for the business. Incomes are credited. So, Discount Received A/c will be credited with Rs. 500.

Constructing the Journal Entry

Based on the above analysis, the journal entry will be:

Comparing with the Options

Let's compare our derived journal entry with the given options:

1. Mr. B A/c Dr Rs. 5,000; To Purchases A/c Rs. 4,000; To Return Outwards A/c Rs. 5,00. (Incorrect - Credits Purchases instead of Cash and Discount)
2. Mr. B A/c Dr Rs. 5,000; To Cash A/c Rs. 4,000; To Return Outwards A/c Rs. 500; To Discount Received A/c Rs. 500. (Matches our derived entry)
3. Mr. B A/c Dr Rs. 4,500; To Cash A/c Rs. 4,000; To Discount Received A/c Rs. 500. (Incorrect - Debit to Mr. B should be Rs. 5,000 to fully settle the original liability. This entry only accounts for the payment part assuming the liability was already reduced by the return)
4. Mr. B A/c Dr Rs. 4,000; To Cash A/c Rs. 4,000. (Incorrect - Ignores the purchase return and the discount received)

Option 2 is the correct journal entry that accurately reflects the return of goods, the cash payment, and the discount received, while settling the original liability of Rs. 5,000 to Mr. B.

Revision Table: Key Accounts in this Transaction

Additional Information: Accounting Principles Applied

This journal entry demonstrates several fundamental accounting principles and concepts:

• Double-Entry System: Every transaction affects at least two accounts, and the total debits must equal the total credits (Rs. 5,000 Dr = Rs. 4,000 Cr + Rs. 500 Cr + Rs. 500 Cr).
• Matching Principle: While not directly shown in this single entry, the original purchase would have been matched against revenue in the period the goods were sold. The return outward is a reduction in the cost of purchases.
• Realization Concept: Discount received is recognized as income when it is received (or the right to receive it is established).
• Personal Accounts: Mr. B's account is a personal account. Debit the receiver, Credit the giver. Here, Mr. B's account is debited because the liability owed to him is being settled.
• Real Accounts: Cash is a real account. Debit what comes in, Credit what goes out. Cash is going out, so it is credited.
• Nominal Accounts: Return Outwards (reduces expense) and Discount Received (income) are nominal accounts. Debit all expenses/losses, Credit all incomes/gains. Return Outwards effectively reduces an expense (Purchases), and Discount Received is an income, both are credited.

Understanding these account types and rules is crucial for correctly preparing journal entries.