Perpetual Inventory System Journal Entries

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Questions and Answers

What is the responsibility of the buyer when the shipping terms are FOB Shipping Point?

To not pay for shipping and not record the cost
To pay for shipping but not record the cost
To not pay for shipping but record the cost
To pay for shipping and record the cost (correct)

What is the purpose of debiting Inventory for the shipping cost?

To increase the cash account
To increase the cost of goods sold
To match the inventory balance with the actual cost paid (correct)
To decrease the accounts payable

What is the effect of a purchase return on the buyer's debt to the seller?

It has no effect on the debt
It decreases the debt (correct)
It increases the debt
It is dependent on the type of return

What is the journal entry for a purchase allowance?

Debit Accounts Payable, Credit Merchandise Inventory (B) Signup and view all the answers

What happens to the amount refunded when a company takes a discount at the time it pays the account?

It is decreased by the discount amount (A) Signup and view all the answers

What is the purpose of recording a discount in the Merchandise Inventory account when paying for inventory purchased on credit?

To reduce what we paid for inventory (C) Signup and view all the answers

What is the main goal of the perpetual inventory system?

To constantly update the inventory balance to match what was paid and what is on hand (A) Signup and view all the answers

What type of account is Accounts Payable, and what is its normal balance?

Current liability, normal credit balance (B) Signup and view all the answers

How many accounts are used for journal entries as the buyer in the perpetual inventory system?

3 accounts (C) Signup and view all the answers

What is the purpose of not recording the discount on May 4?

Because the discount is not yet earned (D) Signup and view all the answers

What is the journal entry for on May 4, and what does it represent?

Debit Merchandise Inventory, credit Accounts Payable, represents the purchase on credit (D) Signup and view all the answers

What is the significance of May 21 in the journal entries?

The payment for the purchase is made on May 21 (D) Signup and view all the answers

Study Notes

Shipping Terms

FOB Destination: Seller is responsible for paying shipping, buyer doesn't pay or record shipping costs.
FOB Shipping Point: Buyer is responsible for paying shipping, must pay and record shipping costs.

Inventory System

Perpetual inventory system: Updates inventory balance to match actual payments.
Uses 3 accounts: Cash, Inventory (Merchandise Inventory), and Accounts Payable.
Debit Inventory for shipping costs, credit Cash or Accounts Payable.

Journal Entries

Purchase returns and allowances: Debit Accounts Payable, credit Merchandise Inventory.
If paid already, debit Cash instead of Accounts Payable.

Paying for Inventory

Debit Accounts Payable, credit Cash when paying for inventory on credit.
If taking a discount, record discount in Merchandise Inventory, reducing inventory cost.

Discount Terms

2/10, n30: 2% discount if paid within 10 days, net 30 days otherwise.

Inventory Purchases

Credit terms: Purchases made on credit, payment delayed.
Debit Merchandise Inventory, credit Accounts Payable.
If paid with cash, no credit terms apply.

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Description

Learn how to journalize purchases under the perpetual inventory system, where inventory balance is constantly updated to reflect purchases and on-hand inventory. Practice using 3 accounts: Cash, Merchandise Inventory, and Accounts Payable.