A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a.Accounts Payable.
b.Inventory.
c.Purchase Discounts.
d.Sales Discounts.
The correct answer and explanation is :
Correct Answer:
c. Purchase Discounts.
Explanation:
In a perpetual inventory system, inventory records are updated continuously to reflect purchases and sales. When a buyer makes a purchase on credit, the inventory account is initially debited, and accounts payable is credited. If the buyer takes advantage of a discount for early payment (e.g., 2/10, net 30), the discount amount is recorded separately.
Accounting Entries in the Perpetual Inventory System:
- At the time of purchase on credit:
- Debit Inventory (to record the purchase)
- Credit Accounts Payable (to recognize the liability)
- At the time of payment within the discount period:
- Debit Accounts Payable (for the full invoice amount)
- Credit Cash (for the reduced amount paid)
- Credit Purchase Discounts (to record the discount taken)
The Purchase Discounts account is used to track reductions in cost due to early payment. It is a contra-expense account that reduces the cost of inventory, indirectly increasing gross profit.
Why Not the Other Options?
- a. Accounts Payable – This account is debited, not credited, when payment is made.
- b. Inventory – Under the perpetual system, inventory is directly adjusted at purchase, and discounts are recorded separately rather than reducing inventory.
- d. Sales Discounts – This applies to sellers, not buyers. Sellers offer discounts to encourage early payment, but buyers record them as purchase discounts.
Conclusion:
In a perpetual inventory system, when a payment is made within the discount period, the buyer credits Purchase Discounts, reflecting the cost savings due to early payment.