Assume the perpetual inventory method is used. 1) the company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) the company returned $1,200 of merchandise to the supplier before payment was made. 3) the liability was paid within the discount period. 4) all of the merchandise purchased was sold for $18,800 cash. what effect will the return of merchandise to the supplier have on the accounting equation?

Both assets and liability sides decreases by $1,200.

Explanation:

Given that,

Purchased merchandise on account = $12,500

Merchandise return to supplier = $1,200

All merchandise sold = $18,800 cash

This will results in the:

Decrease in inventory by $1,200 which means that assets decreases by $1,200.

Accounts payable also reduces by $1,200 which means that liability decreases by $1,200.

Hence, both sides of the balance sheet i.e. assets and liability decreases by $1,200.

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