The following are the rules of debit and credit:
- 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and
stockholders’ equity accounts are debited. - 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.
To determine: Preparejournal entries to record the transactions of Company P during the month of June using perpetual inventory system.
Answer to Problem 5.2AP
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.
The following table shows the journal entries of Company P during June.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
June 1 | Inventory (A+) | 1,040 | ||
Accounts payable (L+) | 1,040 | |||
(To record purchase on account) | ||||
June 3 | Accounts receivable (A+) | 1,200 | ||
Sales revenue (E+) | 1,200 | |||
(To record sales on account) | ||||
Cost of goods sold (E–) | 720 | |||
Inventory (A–) | 720 | |||
(To record cost of goods sold) | ||||
June 6 | Accounts payable (L+) | 40 | ||
Inventory (A+) | 40 | |||
(To record purchase return) | ||||
June 9 | Accounts payable (L–) | 1,000 (1) | ||
Inventory (A–) | 20 (2) | |||
Cash (A–) | 980 (3) | |||
(To record payment made in full settlement less discounts) | ||||
June 15 | Cash (A+) | 1,200 | ||
Accounts receivable (A–) | 1,200 | |||
(To record payment received in full settlement) | ||||
June 17 | Accounts receivable (A+) | 1,200 | ||
Sales revenue (E+) | 1,200 | |||
(To record sales on account) | ||||
Cost of goods sold (E–) | 730 | |||
Inventory (A–) | 730 | |||
(To record cost of goods sold) | ||||
June 20 | Inventory (A+) | 720 | ||
Accounts payable (L+) | 720 | |||
(To record purchase on account) | ||||
June 24 | Cash (A+) | 1,176 (5) | ||
Sales discount (E–) | 24 (4) | |||
Accounts receivable (A–) | 1,200 | |||
(To record payment received in full settlement) | ||||
June 26 | Accounts payable (L–) | 720 | ||
Inventory (A–) | 7.20 (6) | |||
Cash (A–) | 712.80 (7) | |||
(To record payment made in full settlement less discounts) | ||||
June 28 | Accounts receivable (A+) | 1,300 | ||
Sales revenue (E+) | 1,300 | |||
(To record sales on account) | ||||
Cost of goods sold (E–) | 780 | |||
Inventory (A–) | 780 | |||
(To record cost of goods sold) | ||||
June 30 | Sales returns and allowances (E–) | 130 | ||
Accounts receivable (A–) | 130 | |||
(To record sales returns) | ||||
Inventory (A+) | 80 | |||
Cost of goods sold (E+) | 80 | |||
(To adjust cost of goods sold on sales return) |
Table (1)
Working notes:
Calculate the amount of net accounts payable.
Inventory = $1,040
Purchase returns = $40
Calculate the amount of purchase discount.
Net accounts payable = $1,000 (1)
Discount percentage = 2%
Calculate the amount of cash paid.
Net accounts payable = $1,000 (1)
Purchase discount = $20 (2)
Calculate the amount of sales discount.
Accounts receivable = $1,200
Discount percentage = 2%
Calculate the amount of cash received.
Net accounts receivable = $1,200
Sales discount = $24 (4)
Calculate the amount of purchase discount.
Net accounts payable = $720
Discount percentage = 1%
Calculate the amount of cash paid.
Accounts payable = $720
Purchase discount = $7.20 (6)
Explanation of Solution
Transaction on June 1:
- Inventory is an asset and it is increased by $1040. Therefore, debit inventory account with $1,040.
- Accounts payable is a liability and it is increased by $1,040. Therefore, credit accounts payable account with $1,040.
Transaction on June 3:
- Accounts Receivable is an asset and it is increased by $1,200. Therefore, debit account receivable with $1,200.
- Sales revenue is revenue and it increases the value of equity by $1,200. Therefore, credit sales revenue with $1,200.
- Cost of goods sold is an expense account and it decreases the value of equity by $720. Therefore, debit cost of goods sold account with $720.
- Inventory is an asset and it is decreased by $720. Therefore, credit inventory account with $720.
Transaction on June 6:
- Accounts payable is a liability and it is decreased by $40. Therefore, debit accounts payable account with $40.
- Inventory is an asset and it is decreased by $40. Therefore, credit inventory account with $40.
Transaction on June 9:
- Accounts payable is a liability and it is decreased by $1,000. Therefore, debit accounts payable account with $1,000.
- Inventory is an asset and it is decreased by $20. Therefore, credit inventory account with $20.
- Cash is an asset and it is decreased by $980. Therefore, credit cash account with $980.
Transaction on June 15:
- Cash is an asset and it is increased by $1,200. Therefore, debit cash account with $1,200.
- Accounts Receivable is an asset and it is decreased by $1,200. Therefore, credit account receivable with $1,200.
Transaction on June 17:
- Accounts Receivable is an asset and it is increased by $1,200. Therefore, debit account receivable with $1,200.
- Sales revenue is revenue and it increases the value of equity by $1,200. Therefore, credit sales revenue with $1,200.
- Cost of goods sold is an expense account and it decreases the value of equity by $730. Therefore, debit cost of goods sold account with $730.
- Inventory is an asset and it is decreased by $730. Therefore, credit inventory account with $730.
Transaction on June 20:
- Inventory is an asset and it is increased by $720. Therefore, debit inventory account with $720.
- Accounts payable is a liability and it is increased by $720. Therefore, credit accounts payable account with $720.
Transaction on June 24:
- Cash is an asset and it is increased by $1,176. Therefore, debit cash account with $1,176.
- Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $24.
- Accounts Receivable is an asset and it is decreased by $1,200. Therefore, credit account receivable with $1,200.
Transaction on June 26:
- Accounts payable is a liability and it is decreased by $720. Therefore, debit accounts payable account with $720.
- Inventory is an asset and it is decreased by $7.20. Therefore, credit inventory account with $7.20.
- Cash is an asset and it is decreased by $712.80. Therefore, credit cash account with $712.80.
Transaction on June 28:
- Accounts Receivable is an asset and it is increased by $1,300. Therefore, debit account receivable with $1,300.
- Sales revenue is revenue and it increases the value of equity by $1,300. Therefore, credit sales revenue with $1,300.
- Cost of goods sold is an expense account and it decreases the value of equity by $780. Therefore, debit cost of goods sold account with $780.
- Inventory is an asset and it is decreased by $780. Therefore, credit inventory account with $780.
Transaction on June 30:
- Sales return and allowance is an expense account and it decreases the value of equity by $130. Therefore, debit sales returns and allowances account with $130.
- Accounts Receivable is an asset and it is decreased by $130. Therefore, credit account receivable with $130.
- Inventory is an asset and it is increased by $80. Therefore, debit inventory account with $80.
- Cost of goods sold is an expense account and it increases the value of equity by $80. Therefore, credit cost of goods sold account with $80
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Chapter 5 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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