The Inventory account is used in each of the following except the entry to record
a.goods purchased on account.
b.the return of goods purchased.
c.payment of freight on goods sold.
d.payment within the discount period.
The correct answer and explanation is :
In a perpetual inventory system, the Inventory account is updated continuously to reflect real-time changes resulting from various transactions. Among the options provided, the Inventory account is not used in the entry to record:
c. Payment of freight on goods sold.
Explanation:
Let’s analyze each option to understand how it interacts with the Inventory account:
a. Goods purchased on account:
When a company purchases goods on account, it acquires inventory that will be sold to customers. In a perpetual inventory system, this transaction increases the Inventory account and establishes a liability to the supplier. The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Inventory | \$X | |
| Accounts Payable | \$X |
This entry reflects the addition of inventory and the obligation to pay the supplier.
b. The return of goods purchased:
If a company returns previously purchased goods to the supplier, it decreases its inventory and reduces its liability. The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | \$Y | |
| Inventory | \$Y |
This entry indicates a reduction in both the Inventory account and the Accounts Payable.
c. Payment of freight on goods sold:
Freight costs incurred when shipping goods to customers are considered delivery expenses and are not directly related to the Inventory account. These costs are recorded as operating expenses. The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Delivery Expense | \$Z | |
| Cash | \$Z |
This entry records the expense associated with delivering goods to customers and decreases cash. The Inventory account remains unaffected.
d. Payment within the discount period:
When a company pays its supplier within a discount period, it may receive a reduction in the amount owed. In a perpetual inventory system, the Inventory account is adjusted to reflect this discount. The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | \$W | |
| Cash | \$V | |
| Inventory | \$D |
Here, \$W represents the original amount owed, \$D is the discount received, and \$V is the net cash paid (\$W – \$D). The Inventory account is credited to reflect the reduction in inventory cost due to the discount.
Conclusion:
Among the options provided, only the payment of freight on goods sold does not involve the Inventory account. This is because such freight costs are considered delivery expenses and are recorded separately from inventory-related transactions.