Understanding Journal Entries for Inventory Purchases

What is the journal entry to record a purchase of inventory on account under a perpetual inventory system?

a) Debit Inventory $4800; Credit Accounts Payable $4800
b) Debit Cost of Goods Sold $4800; Credit Accounts Payable $4800
c) Debit Accounts Payable $4800; Credit Cost of Goods Sold $4800
d) Debit Cost of Goods Sold $4800; Credit Inventory $4800

Answer:

The correct journal entry under a perpetual inventory system for a purchase of inventory on account is to debit Inventory and credit Accounts Payable for the amount of the purchase.

Under a perpetual inventory system, when a company purchases inventory on account (meaning, to be paid for later), the company needs to record the purchase by increasing (debiting) its Inventory account to reflect the new assets it now owns. At the same time, it must acknowledge the liability it has incurred, which is done by increasing (crediting) the Accounts Payable account.

Therefore, the correct journal entry to record the purchase of inventory on account is:

Debit Inventory $4800; Credit Accounts Payable $4800

This entry shows that inventory has increased and that there is now a payable created due to the purchase which will be paid in the future.