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

4. Merchandising Operations

Perpetual Inventory - Purchases

Financial Accounting

4. Merchandising Operations

Perpetual Inventory - Purchases

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Multiple Choice

Levine Company uses the perpetual inventory system. When Levine purchases inventory on account, which of the following journal entries is recorded?

Debit Cost of Goods Sold; Credit Inventory

Debit Accounts Payable; Credit Inventory

Debit Purchases; Credit Accounts Payable

Debit Inventory; Credit Accounts Payable

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Verified step by step guidance

Understand the perpetual inventory system: In this system, inventory and cost of goods sold (COGS) are updated continuously with each purchase and sale. This means that inventory accounts are directly affected by purchases and sales transactions.

Identify the nature of the transaction: The problem states that Levine Company is purchasing inventory on account. This means the company is acquiring inventory but has not yet paid for it, creating a liability (Accounts Payable).

Determine the accounts involved: Since inventory is being purchased, the 'Inventory' account (an asset) will increase. Since the purchase is on account, the 'Accounts Payable' account (a liability) will also increase.

Decide the appropriate debits and credits: In accounting, increases in assets are recorded as debits, and increases in liabilities are recorded as credits. Therefore, the 'Inventory' account will be debited, and the 'Accounts Payable' account will be credited.

Record the journal entry: The correct journal entry for this transaction is: Debit Inventory; Credit Accounts Payable. This reflects the increase in inventory and the corresponding liability for the purchase made on account.