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 a company sells inventory on account, it is recording a sale that will be paid for later. This means the company is extending credit to the customer, which is why Accounts Receivable is involved. Let’s break down the journal entry for this transaction:
- Revenue Recognition:
- Credit to Sales: When inventory is sold, the company earns revenue from the transaction. The appropriate account to recognize this revenue is Sales (a revenue account). This account is credited to show an increase in sales income.
- The corresponding debit for this credit is Accounts Receivable, which represents the money owed to the company by the customer. Since payment will not be received immediately, the sale is recorded as a receivable.
- Cost of Goods Sold (COGS):
- Debit to Cost of Goods Sold (COGS): This is an expense account that represents the cost of the inventory that was sold. It is debited because the company has incurred an expense by parting with the inventory.
- Credit to Inventory: The inventory account is credited to reflect the decrease in inventory, as the company has sold a portion of its stock.
In summary, the journal entry for the sale of inventory on account would be:
- Debit Accounts Receivable (because the company is expecting payment in the future).
- Credit Sales (to recognize the revenue from the sale).
- Debit Cost of Goods Sold (to recognize the expense of the inventory sold).
- Credit Inventory (to decrease the inventory on hand).
Therefore, the correct choice is b. debit to accounts receivable, as it reflects the increase in the amount the company expects to collect from the customer in the future.