Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

When direct labor costs are recorded in the accounting system, which of the following journal entries is correct?

Debit Finished Goods Inventory; Credit Wages Payable

Debit Wages Expense; Credit Work in Process Inventory

Debit Work in Process Inventory; Credit Wages Payable

Debit Manufacturing Overhead; Credit Cash

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Verified step by step guidance

Understand the nature of direct labor costs: Direct labor costs are incurred during the production process and are directly traceable to specific jobs or products. These costs are recorded as part of the Work in Process Inventory, which represents the costs of unfinished goods.

Recognize the correct accounts involved: When direct labor costs are recorded, the Work in Process Inventory account is debited to reflect the increase in production costs, and the Wages Payable account is credited to record the liability owed to employees for their labor.

Analyze why other options are incorrect: For example, 'Debit Finished Goods Inventory; Credit Wages Payable' is incorrect because Finished Goods Inventory is only debited when production is complete, not during the labor process. Similarly, 'Debit Wages Expense; Credit Work in Process Inventory' is incorrect because wages expense is not directly tied to production costs in this context.

Understand the journal entry format: The journal entry for recording direct labor costs should follow the format: Debit Work in Process Inventory (to increase production costs) and Credit Wages Payable (to record the liability).

Apply this understanding to similar scenarios: Whenever direct labor costs are incurred, ensure that they are recorded as part of Work in Process Inventory until the production process is complete, at which point costs are transferred to Finished Goods Inventory.