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?

    <p>Debit Accounts Payable, Credit Merchandise Inventory (B)</p> 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?

    <p>It is decreased by the discount amount (A)</p> 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?

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

    What is the main goal of the perpetual inventory system?

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

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

    <p>Current liability, normal credit balance (B)</p> Signup and view all the answers

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

    <p>3 accounts (C)</p> Signup and view all the answers

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

    <p>Because the discount is not yet earned (D)</p> Signup and view all the answers

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

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

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

    <p>The payment for the purchase is made on May 21 (D)</p> 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.

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