The correct option for the question regarding a debit balance of N420 on the purchase ledger control account is
A. trade creditors have been paid by N420.
Detailed Explanation
- Understanding the Purchase Ledger Control Account:
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The purchase ledger control account is a summary account that reflects all transactions related to purchases made on credit from suppliers (trade creditors). It helps businesses keep track of what they owe to their suppliers.
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Nature of Balances:
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In accounting, a debit balance in the purchase ledger control account indicates that the total debits (payments made to creditors) exceed the total credits (amounts owed to creditors). This is contrary to what one might expect, as we usually think of a credit balance as indicating amounts owed.
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Interpreting a Debit Balance:
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A debit balance of N420 means that the company has paid more to its creditors than it currently owes. This can happen if:
- The company has made payments to suppliers for goods or services received.
- There may have been overpayments or adjustments made in favor of the creditors.
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Why Option A is Correct:
- Since the debit balance indicates that the company has paid N420 more than it owes, it directly implies that trade creditors have been paid by N420. This means that the company has settled its obligations to the creditors to the extent of N420 more than what it currently owes.
Why the Other Options are Incorrect
- Option B: Trade creditors are owed N420:
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This option is incorrect because a debit balance does not indicate that the company owes money. Instead, it shows that the company has overpaid its creditors. If there were a credit balance, then it would indicate that the company owes money to its creditors.
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Option C: Goods returned to trade creditors amounted to N420:
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While returning goods could affect the balance, a debit balance does not specifically indicate that goods were returned. A return would typically be recorded as a credit in the purchase ledger, which would reduce the amount owed, not create a debit balance.
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Option D: Total supplies from trade creditors amounted to N420:
- This option is misleading. The total supplies from trade creditors would be reflected in the credit side of the purchase ledger control account. A debit balance does not indicate the total supplies; it indicates payments made that exceed the amounts owed.
Common Pitfalls
- Students often confuse debit and credit balances. Remember that:
- A debit balance in the purchase ledger means overpayment or excess payments to creditors.
- A credit balance indicates amounts owed to creditors.
- Misinterpreting the nature of transactions (like returns or payments) can lead to incorrect conclusions about the balances.
Revision Summary
- A debit balance in the purchase ledger control account indicates overpayment to creditors.
- The correct interpretation of a debit balance is that trade creditors have been paid more than what is owed.
- Always differentiate between debit and credit balances to avoid confusion in accounting.
- Understand the implications of transactions (payments, returns) on the ledger balances.