Question

Nov.	5	Purchased 600 units of product at a cost of $10 per unit. Terms of the sale are 2/10, n/60; the invoice is dated November 5.
Nov.	7	Returned 25 defective units from the November 5 purchase and received full credit.
Nov.	15	Paid the amount due from the November 5 purchase, less the return on November 7.

     

Prepare the journal entries to record each of the above purchases transactions of a merchandising company. Assume a perpetual inventory system.

Answer 1

Concepts and reason

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded date-wise with the debit and credit entry to the respective accounts in transaction. Journal entry is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

Adjusting Entries: Adjusting entries are recorded for the adjustments made at the end of accounting year to convert the accounting records of the company as accrual basis of accounting from cash basis accounting. They are made before when financial statements are prepared at the end of accounting period.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Debit increases all asset accounts. Debit decreases all liabilities and stockholders’ equity account.

2.Credit increases all liabilities and stockholders’ equity account. Credit decreases all asset accounts.

Perpetual inventory system: Perpetual system is one of the systems to record the inventory flow. It calculates the quantity of inventory on hand from time to time. It uses inventory account to record the inflow and outflow of inventory. Freight-in is also recorded to the inventory account. 

Fundamentals

Accounting Equation: This is a mathematical equation which represents the relationship between assets, liabilities and stockholders’ equity. This is also known as balance sheet equation. It is represented as follows

${\rm{Assets (A)}} = {\rm{Liabilities (L)}} + {\rm{Stockholders' Equity (E)}}$

Asset (A): The source which is possessed or controlled to generate income in the future is known as an asset. Examples: Cash, prepaid expense, Machinery, Goodwill, and Supplies. (A+) indicates increase in asset and (A–) indicates decrease in asset.

Liability (L): Liability is an agreement made by the company to pay a certain amount for the goods or services received by the company in the past. Examples: Accounts Payable, Loans and Advances, and Outstanding Expenses. (L+) indicates increase in liability and (L–) indicates decrease in liability.

Stockholders’ equity (E): Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known also as net assets of the company, which are assets minus liabilities. Examples: Retained Earnings, Dividends, and Capital. . (E+) indicates increase in equity and (E–) indicates decrease in equity.

Prepare journal entry to record the purchase of Merchandise Inventory as follows:

(Working Notes):

$\begin{array}{c}\\{\rm{Value of goods purchased = Units purchased }} \times {\rm{ cost per unit}}\\\\{\rm{ = 600 units }} \times {\rm{ \$ 10}}\\\\{\rm{ = \$ 6,000}}\\\end{array}$

Prepare journal entry to record the return of defective merchandise Inventory as follows:

(Working Notes):

$\begin{array}{c}\\{\rm{Value of goods returned = Units returned }} \times {\rm{ cost per unit}}\\\\{\rm{ = 25 units }} \times {\rm{ \$ 10}}\\\\{\rm{ = \$ 250}}\\\end{array}$

Prepare journal entry to record the return of defective merchandise Inventory as follows:

(Working Notes):

$\begin{array}{c}\\{\rm{Discount Received = Balance in Accounts Payable}} \times {\rm{ Discount Rate}}\\\\{\rm{ = }}\left( {\$ 6,000 - \,{\rm{\$ 250}}} \right){\rm{ }} \times {\rm{ 2\% }}\\\\{\rm{ = \$ 5,750}} \times {\rm{ 2\% }}\\\\{\rm{ = \$ 115}}\\\end{array}$

Ans: Part 1

Part 2

Part 3