What type of account is Purchases Returns and Allowances?Multiple ChoiceContra RevenueRevenueContra ExpenseExpense
Question
What type of account is Purchases Returns and Allowances?
Multiple Choice
- Contra Revenue
- Revenue
- Contra Expense
- Expense
Solution
Step 1: Break Down the Problem
To determine the type of account Purchases Returns and Allowances represents, we need to analyze its function in accounting.
Step 2: Relevant Concepts
- Contra Revenue: Typically accounts that reduce total revenue.
- Revenue: Income earned from normal business operations.
- Contra Expense: Accounts that reduce total expenses.
- Expense: Costs incurred to earn revenue.
Purchases Returns and Allowances account is used to record returns or allowances for purchases made, which ultimately reduces the total purchase expense.
Step 3: Analysis and Detail
- When goods are returned, the purchase amounts decrease, which essentially reduces the expenses incurred in the cost of goods sold.
- It is treated as a reduction in the expense (cost of goods sold) rather than as an actual revenue-generating account.
Step 4: Verify and Summarize
Considering the explanation above, Purchases Returns and Allowances can be identified as a contra expense account because it reduces the total purchase expenses.
Final Answer
Purchases Returns and Allowances is classified as a Contra Expense account.
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