Multiple Choice
Levine Company uses the perpetual inventory system. When Levine purchases inventory on account, which of the following journal entries is recorded?
130
views
4. Merchandising Operations
Perpetual Inventory - Purchases
Multiple Choice
In a perpetual inventory system, what journal entry is recorded when a company purchases inventory on account?
A
Debit Accounts Payable; credit Inventory.
B
Debit Inventory; credit Accounts Payable.
C
Debit Purchases; credit Accounts Payable.
D
Debit Cost of Goods Sold; credit Accounts Payable.
Verified step by step guidance1
Step 1: Understand the perpetual inventory system. In this system, inventory records are updated continuously for each purchase and sale, so the Inventory account is directly affected when inventory is purchased.
Step 2: Identify the accounts involved in purchasing inventory on account. Since the company has not paid cash yet, it owes money, so Accounts Payable (a liability account) is credited to reflect this obligation.
Step 3: Determine the account to debit. Because inventory is increasing, the Inventory account (an asset) is debited to show the addition of goods.
Step 4: Formulate the journal entry. The correct entry is to debit Inventory and credit Accounts Payable, reflecting the increase in assets and the increase in liabilities.
Step 5: Write the journal entry in proper format:
\(\text{Debit Inventory} \quad \text{XXX}\)
\(\text{Credit Accounts Payable} \quad \text{XXX}\)
where XXX represents the cost of the inventory purchased.
Related Videos
Related Practice
