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While practicing with BPP FIA Practice and Revision Kit, I stumbled upon the question where Refund received was involved. I was confused why it’s recorded as Credit entry in the Trade payables. Open Tuition AI says “The double entry for a refund received is to debit the cash account and credit the payables account. This reflects the increase in cash and the decrease in the amount owed to the supplier.” but doesn’t DEBIT entry decrease the liability, and not credit?
A refund is simply a repayment of cash (whatever the reason for it).
Suppose we owe a supplied $1000. We therefore have a credit balance on payables of $1000.
Suppose we then pay the supplier $1100 (we pay too much by mistake). We credit cash and debit payables with $1100. So we now have a debit balance of $100 on the payables account.
The supplier then agrees to pay the extra $100 back to us – i.e. a refund of $100. We debit cash and credit payables. The balance on payables is now zero which is as it should be 🙂
I was trying to find the proper explanation on the internet the whole day. Thank you very much for your reply, you’re the best! 🙂
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