Uncle Joe Inc. sold merchandise that it had purchased for $8,400 on account and subject to terms of 2/10, n/30. The merchandise was sold for $9,500. Uncle Joe Inc. paid for the merchandise 3 days later.
Record the journal entries for this transaction
To record the inventory purchase
Debit Merchandise Inventory 8,400
Credit Accounts Payable 8,400
To pay for the inventory purchase with the discount
Debit Accounts Payable 8,400
Credit Merchandise Inventory 168
Credit Cash 8,232
Another way to illustrate applying purchase discount is as follows
First reduce the accounts payable and merchandise inventory
Debit Accounts payable 168
Credit Merchandise Inventory 168
Then pay for the inventory
Debit accounts payable 8,232
Credit Cash 8,232
The net effect of either method is the same. In the first method we skipped adjusting the accounts payable account and directly reduced the merchandise inventory account. In the second method we reduced the accounts payable account first and then we paid it. Either way, our accounts payable balance is zero after payment.
Record the reduction in inventory after the sale
To record the sale, first reduce inventory and increase the expense account – costs of goods sold