Concept explainers
Record the purchase and sales transactions of Company M during July under perpetual inventory system.
Explanation of Solution
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the purchase of merchandise inventory on account.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 3 | Merchandise Inventory | 15,000 | ||
Accounts Payable | 15,000 | |||
(To record purchases of inventory on account) |
Table (1)
Description:
- Merchandise inventory is an asset and it is increased by $15,000. Therefore, debit inventory account with $15,000.
- Accounts payable is a liability and it is increased by $15,000. Therefore, credit accounts payable account with $15,000.
Record the journal entry for the sale of inventory on account.
Date | Accounts and Explanation | Debit ($) | Credit ($) |
July 7 | Accounts Receivable | 11,500 | |
Sales Revenue | 11,500 | ||
(To record the sale of inventory on account) |
Table (2)
Description
- Accounts Receivable is an asset and it is increased by $11,500. Therefore, debit account receivable with $11,500.
- Sales revenue is revenue and it increases the value of equity by $11,500. Therefore, credit sales revenue with $11,500.
Record the journal entry for cost of goods sold.
Date | Accounts and Explanation | Debit ($) | Credit ($) |
July 7 | Cost of Goods Sold | 7,750 | |
Merchandise Inventory | 7,750 | ||
(To record the cost of goods sold) |
Table (3)
Description
- Cost of goods sold is an expense account and it decreases the value of equity by $7,750. Therefore, debit cost of goods sold account with $7,750.
- Merchandise Inventory is an asset and it is decreased by $7,750. Therefore, credit inventory account with $7,750.
Record the purchase of merchandise inventory on account.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 10 | Merchandise Inventory | 14,200 | ||
Accounts Payable | 14,200 | |||
(To record purchases of inventory on account) |
Table (4)
Description:
- Merchandise inventory is an asset and it is increased by $14,200. Therefore, debit inventory account with $14,200.
- Accounts payable is a liability and it is increased by $14,200. Therefore, credit accounts payable account with $14,200.
Record the journal entry for delivery charges paid.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
July 11 | Delivery Expense | 300 | ||
Cash | 300 | |||
(To record the payment of delivery charges) |
Table (5)
Description:
- Delivery expense is an expense and it decreases the value of equity by $300. Therefore, debit delivery expense account with $300.
- Cash is an asset and it is decreased by $300. Therefore, credit cash account with $300.
Record the journal entry for sales return:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
July 12 | Sales Returns and Allowance | 2,000 | |
Accounts Receivable | 2,000 | ||
(To record the sales return) | |||
Merchandise Inventory | 1,450 | ||
Cost of goods sold | 1,450 | ||
(To record the reversal of cost of goods sold on sales return) |
Table (6)
Description:
- Sales return and allowance is an expense account and it decreases the value of equity by $2,000. Therefore, debit sales returns and allowances account with $2,000.
- Accounts Receivable is an asset and it is decreased by $2,000. Therefore, credit account receivable with $2,000.
- Inventory is an asset and it is increased by $1,450. Therefore, debit inventory account with $1,450.
- Cost of goods sold is an expense account and it increases the value of equity by $1,450. Therefore, credit cost of goods sold account with $1,450.
Record the journal entry for credit memo received.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 14 | Accounts Payable | 1,200 | ||
Merchandise Inventory | 1,200 | |||
(To record the credit memo received) |
Table (7)
Description:
- Accounts payable is a liability and it is decreased by $1,200. Therefore, debit accounts payable account with $1,200.
- Inventory is an asset and it is decreased by $1,200. Therefore, credit inventory account with $1,200.
Record the journal entry for freight charges paid.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
July 15 | Accounts Payable | 200 | ||
Cash | 200 | |||
(To record the payment of freight charges for Corporation O) |
Table (8)
Description:
- Accounts payable is a liability and it is decreased by $200. Therefore, debit accounts payable account with $200.
- Cash is an asset and it is decreased by $200. Therefore, credit cash account with $200.
Record the journal entry for receipt of payment:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
July 17 | Cash | 9,310 (3) | |
Sales Discounts | 190 (2) | ||
Accounts Receivable | 9,500 (1) | ||
(To record receiving cash on sales after discounts and returns) |
Table (9)
Description:
- Cash is an asset and it is increased by $9,310. Therefore, debit cash account with $9,310.
- Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $190.
- Accounts Receivable is an asset and it is decreased by $9,500. Therefore, credit account receivable with $9,500.
Working notes:
Calculate the amount of accounts receivable.
Accounts receivable = $11,500
Sales returns = $2,000
Calculate the amount of sales discount.
Net accounts receivable = $9,500 (1)
Discount percentage = 2%
Calculate the amount of cash received.
Net accounts receivable = $9,500 (1)
Sales discount = $190 (2)
Record the journal entry for the due amount paid.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 20 | Accounts Payable | 13,000 (4) | ||
Merchandise Inventory | 130 (5) | |||
Cash | 12,870 (6) | |||
(To record paying cash on purchases after discounts and returns) |
Table (10)
Working Notes:
Calculate accounts payable amount.
Inventory = $14,200
Inventory returns = $1,200
Calculate purchase discount / inventory.
Net accounts payable = $13,000 (4)
Discount percentage = 1%
Calculate cash paid.
Accounts payable = $13,000 (4)
Purchase discount / Inventory = $130 (5)
Description:
- Accounts payable is a liability and it is decreased by $13,000. Therefore, debit accounts payable account with $13,000.
- Merchandise Inventory is an asset and it is decreased by $130. Therefore, credit inventory account with $130.
- Cash is an asset and it is decreased by $12,870. Therefore, credit cash account with $12,870.
Record the journal entry for the sale of inventory on account.
Date | Accounts and Explanation | Debit ($) | Credit ($) |
July 21 | Accounts Receivable | 11,000 | |
Sales Revenue | 11,000 | ||
(To record the sale of inventory on account) |
Table (11)
Description
- Accounts Receivable is an asset and it is increased by $11,000. Therefore, debit account receivable with $11,000.
- Sales revenue is revenue and it increases the value of equity by $11,000. Therefore, credit sales revenue with $11,000.
Record the journal entry for cost of goods sold.
Date | Accounts and Explanation | Debit ($) | Credit ($) |
July 21 | Cost of Goods Sold | 7,000 | |
Merchandise Inventory | 7,000 | ||
(To record the cost of goods sold) |
Table (12)
Description
- Cost of goods sold is an expense account and it decreases the value of equity by $7,000. Therefore, debit cost of goods sold account with $7,000.
- Merchandise Inventory is an asset and it is decreased by $7,000. Therefore, credit inventory account with $7,000.
Record the journal entry for credit memo issued:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
July 24 | Sales Returns and Allowance | 1,000 | |
Accounts Receivable | 1,000 | ||
(To record the credit memo issued) |
Table (13)
Description:
- Sales return and allowance is an expense account and it decreases the value of equity by $1,000. Therefore, debit sales returns and allowances account with $1,000.
- Accounts Receivable is an asset and it is decreased by $1,000. Therefore, credit account receivable with $1,000.
Record the journal entry for the balance amount received.
Journal Entry | ||||
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
July 30 | Cash | 9,900 (9) | ||
Sales Discounts | 100 (8) | |||
Accounts Receivable | 10,000 (7) | |||
(To record cash received and discounts allowed) |
Table (14)
Description:
- Cash is an asset and it is increased by $9,900. Therefore, debit cash account with $9,900.
- Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $100.
- Accounts Receivable is an asset and it is decreased by $10,000. Therefore, credit account receivable with $10,000.
Working notes:
Calculate the amount of accounts receivable.
Accounts receivable = $11,000
Sales returns = $1,000
Calculate the amount of sales discount.
Net accounts receivable = $10,000 (7)
Discount percentage = 1%
Calculate the amount of cash received.
Net accounts receivable = $10,000 (7)
Sales discount = $100 (8)
Record the journal entry for the due amount paid.
Journal Entry | ||||
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 30 | Accounts Payable | 14,800 | ||
Cash | 14,800 (10) | |||
(To record paying cash on purchases after deducting freight charges) |
Table (15)
Working Notes:
Calculate the net accounts payable.
Accounts payable = $15,000
Freight charges = 200
Description:
- Accounts payable is a liability and it is decreased by $14,800. Therefore, debit accounts payable account with $14,800.
- Cash is an asset and it is decreased by $14,800. Therefore, credit cash account with $14,800.
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Chapter 5 Solutions
Principles of Financial Accounting.
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