The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a.Accounts Payable.
b.Purchase Returns and Allowances.
c.Sales Revenue.
d.Inventory.
The correct answer and explanation is :
The correct answer is:
a. Accounts Payable.
Explanation:
Under the perpetual inventory system, inventory records are updated continuously as transactions occur. When a company purchases inventory on account (on credit), it records the transaction by debiting Inventory and crediting Accounts Payable. If the company later returns merchandise to the supplier, it must reverse the original purchase entry to reflect the reduction in inventory and liability.
Journal Entry for Purchase on Account:
When inventory is purchased on credit, the entry is:
- Debit: Inventory (to record the asset increase)
- Credit: Accounts Payable (to record the obligation to pay the supplier)
Journal Entry for Returning Inventory:
When merchandise is returned, the company needs to reverse the impact of the initial transaction:
- Debit: Accounts Payable (reducing the liability owed to the supplier)
- Credit: Inventory (reducing the asset, as the returned goods are no longer owned)
Thus, Accounts Payable is credited when the return is recorded, making option (a) the correct answer.
Why Not the Other Options?
- (b) Purchase Returns and Allowances: This account is used under a periodic inventory system, not a perpetual system. The perpetual system directly adjusts inventory.
- (c) Sales Revenue: Sales revenue is related to selling goods, not returning purchased inventory. It does not impact purchases.
- (d) Inventory: Inventory is credited, but the question asks which account is debited. The correct debit account is Accounts Payable.
Conclusion:
Under the perpetual inventory system, when returning merchandise purchased on account, the correct journal entry includes a debit to Accounts Payable and a credit to Inventory to reflect the return.