Shankar Company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 2 for $34,000. In addition to the cost of inventory, the company also pays $540 for freight charges associated with the purchase on the same day.

Required:

Record the purchase of inventory on February 2, including the freight charges.

The Record the purchase of inventory on February 2, including the freight charges would be as follows:

Debit Credit

February 2

Merchandise Inventory $34,000

Accounts Payable $34,000

(To Record the Company Purchases Inventory on Account)

Debit Credit

February 2

Merchandise Inventory $540

Cash $540

(To Record the Freight Charges Paid by the Company)

Explanation:

The Record the purchase of inventory on February 2, including the freight charges would be as follows:

The company purchases inventory on account on February 2, for $34,000, therefore, journal entry would be:

Debit Credit

February 2

Merchandise Inventory $34,000

Accounts Payable $34,000

(To Record the Company Purchases Inventory on Account)

The company also pays $410 for freight charges associated with the purchase on the same day. Therefore journal would be:

Debit Credit

February 2

Merchandise Inventory $540

Cash $540

(To Record the Freight Charges Paid by the Company)

Dr merchandise inventory ($34,000+$540) $34,540

Cr accounts payable $34,000

Cr cash $540

Explanation:

The cost of inventory purchased is shown as an increase in merchandise inventory since perpetual system of inventory requires that inventory is updated each time there is a receipt or sale of inventory.

In other words, the cost of inventory purchased is debited to merchandise inventory and credited to accounts payable.

The cost of freight is also added to the cost of inventory while it is credited to cash account.