Multiple Choice
Which of the following best explains why a perpetual inventory system is considered an effective means of control over inventory?
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4. Merchandising Operations
Perpetual Inventory - Purchases
Multiple Choice
Under a perpetual inventory system, what journal entry should a company record when it purchases inventory on account?
A
Debit Accounts Payable; Credit Inventory
B
Debit Inventory; Credit Cash
C
Debit Inventory; Credit Accounts Payable
D
Debit Purchases; Credit Accounts Payable
Verified step by step guidance1
Step 1: Understand the perpetual inventory system. Under this system, inventory accounts are updated continuously for each purchase and sale, reflecting real-time inventory levels.
Step 2: Identify the accounts involved in purchasing inventory on account. Since the purchase is on account, the company owes money, so 'Accounts Payable' (a liability account) is involved. The inventory account (an asset) increases because the company acquires more inventory.
Step 3: Determine the correct debit and credit entries. When inventory is purchased, the Inventory account is debited to show an increase in assets. Since the purchase is on account, Accounts Payable is credited to show an increase in liabilities.
Step 4: Write the journal entry. The journal entry will debit Inventory and credit Accounts Payable, reflecting the increase in inventory and the obligation to pay the supplier later.
Step 5: Confirm why other options are incorrect. For example, debiting Purchases is used in periodic inventory systems, and crediting Cash applies only when payment is made immediately, not on account.
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