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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

JOURNAL ENTRIES UNDER THE PERPETUAL INVENTORY SYSTEM Bhushan Building Supplies entered into the following transactions. Prepare journal entries under the perpetual inventory system.

June    1 Purchased merchandise on account from Brij Builder’s Materials,$500,000.
    3 Purchased merchandise for cash, $400,000.
    5 Sold merchandise on account to Champa Construction for $20,000. The merchandise cost $15,000.

To determine

Prepare journal entries under the perpetual inventory system.

Explanation

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

Adjustment entries:

Adjusting entries are those entries which are made at the end of the year to update all the balances in the financial statements to show the true financial information and to maintain the records according to accrual basis principle.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Record the journal entries:

DateAccount titles and ExplanationDebit ($)Credit ($)
 June 1Merchandise Inventory 500,000 
  Accounts Payable(Materials B)  500,000
  (To record purchase of inventory on account)  

Table (1)

  • Merchandise inventory is a current asset and it is increased. Therefore, debit merchandise inventory account by $500,000.
  • Accounts payable is a current liability and it is increased. Therefore, credit accounts payable account by $500,000
DateAccount titles and ExplanationDebit ($)Credit ($)
 June 3Merchandise Inventory 400,000 
  Cash  400,000
   (To record purchase of inventory for cash)  

Table (2)

  • Merchandise inventory is a current asset and it is increased...

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