A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.
The correct answer and explanation is :
The correct answer is b. debit to accounts receivable.
Explanation:
When inventory is sold on account, it means the business has transferred ownership of the goods to the customer but has not yet received cash. This transaction involves two primary components: the revenue earned from the sale and the cost associated with the inventory sold.
- Debit to Accounts Receivable:
Since the sale is made on account, the company has a right to receive payment in the future. This means the company must record a debit to Accounts Receivable to reflect the amount that customers owe. In accounting terms, “accounts receivable” is an asset because it represents money that is expected to be collected in the future. - Credit to Sales:
The sale of the inventory must be recognized as revenue, so a credit to Sales (or Sales Revenue) is recorded. Sales Revenue reflects the amount earned from the transaction, which will increase the company’s overall revenue on the income statement. - Debit to Cost of Goods Sold (COGS):
The cost of the inventory that was sold must also be recorded. This is done by debiting Cost of Goods Sold (COGS), an expense account that represents the cost incurred by the company to produce or purchase the inventory. - Credit to Inventory:
When inventory is sold, the physical goods are transferred to the customer, so the company needs to reduce the value of its inventory on hand. This is done by crediting Inventory, which decreases the inventory asset on the balance sheet.
Why not the other options?
- a. Debit to inventory: This would not be correct in the sale journal entry, as inventory is credited when it is sold (decreasing inventory).
- c. Debit to sales: Sales are credited to increase revenue, not debited.
- d. Credit to cost of goods sold: COGS is debited because it’s an expense that increases.
In summary, the correct journal entry for the sale of inventory on account involves a debit to Accounts Receivable, a credit to Sales, a debit to Cost of Goods Sold, and a credit to Inventory.