Question

Q: Cash payment for the purchase of inventory requires credit to inventory.

A: True or False

(n) Note payable Interest expense Cash $10,000 $ 100 $10,100 (0) $ 200 Cash Accounts receivable $ 200 $ 1,500 (p) Wage expense Cash $ 1,500 Totals $119,650 $119,650 Key ideas: i. A journal is a chronological recording of transactions using debits and credits (debit simply means left, and credit simply means right) ii. Journalizing a transaction is just a fancy way of saying formally recording a transaction in the books. iii. Recording a transaction requires a journal entry (or entries) (i.e., JES). iv. Notice the format or form of the JE: all debit (i.e., left) pieces first, then the credit i.e., right) pieces. Dollar amounts for the debit pieces in the debit column, credit pieces in the credit column. v. Notice that each entry fulfills the accounting equation (or equality). In other words, every entry balances. vi. There are two keys to knowing when to debit and when to credit: 1) is the goal to increase or decrease the balance in the account? and 2) what is the normal balance in the account? - Think of an account as a bucket that contains quantities. - Recall the accrual-basis accounting equation: Assets = Liabilities + Shareholders' Equity, which we can restate as Cash + A/R + Inventory + Prepaid Rent + Equipment = A/P + N/P + Contributed Capital + Revenues - Expenses). - Anything on the left side of the equality symbol maintains a normal debit balance. So, if you encountered a transaction which requires an increase in Cash, then you need to debit the Cash account (i.e., you are essentially saying add more cash to the cash that is already in the bucket). - Anything on the right side of the equality symbol maintains a normal credit balance. So, if you encountered a transaction which requires an increase in Contributed Capital or Earned Capital, then you need to credit these accounts (i.e., you are essentially saying add more contributed or earned capital to the contributed or earned capital that is already in the bucket). - Notice the compound JE used for transaction (i). You could use this type of entry for transaction (e) as well. - Guide for debits and credits: Your analysis suggests... Your journal entry requires... Increasing an asset Decreasing an asset Increasing C/C or E/C Decreasing C/C or E/C Debits! Credits! Credits! Debits!

Answer 1

False

When inventory is purchased, the entry would be

Debit - Inventory (as inventory is an asset, it is debited with an increase)

Credit - Cash (as cash is a real asset, it is credited as it goes out)