What is the effect on the trial balance if a purchase return is recorded incorrectly as a purchase?

• A. It would overstate purchases and understate purchase returns, causing an imbalance on the trial balance.
• B. It would have no effect on the trial balance.
• C. It would understate purchases and overstate purchase returns, balancing the trial balance.
• D. It would only affect the cash book, not the trial balance.

Answer: (A)

Goods returned to a supplier should reduce net purchases by using a contra-purchases entry. On the trial balance, purchases are a debit and purchase returns (the contra) reduces that total to give net purchases.

If a purchase return is recorded as a new purchase, you increase the purchases figure by the amount of the return and fail to record the reduction in purchases through the purchase returns account. In effect, purchases are overstated and the purchase returns figure is understated. Because the trial balance needs the total debits to equal the total credits, this mismatch creates an imbalance equal to the amount of the misclassification.

So the correct idea is that the misrecording would overstate purchases and understate purchase returns, leading to an imbalance on the trial balance.