Question

In the periodic inventory system, purchases of merchandise for resale are debited to the purchases account.

True

False

Answer 1

The statement is true.

In periodic inventory system, a merchandising company uses the Purchases account to record the cost of merchandise bought for resale during the current accounting period.

The Purchases account, which is increased by debits, appears with the income statement accounts in the chart of accounts.

To explain this let us illustrate the periodic inventory method journal entries.

Let us assume that Stanley Store made two purchases of merchandise from Ram Company.

• On June 10, Stanley purchased $150,000 of merchandise with credit terms of 2/10, n30 and shipping terms FOB Destination.
• on June 21, Stanley purchased $20,000 of merchandise for cash with shipping terms FOB Shipping Point.

The required journal entries for Stanley are:

Date	Account	Debit	Credit
Jun 10	Purchases	30,000
	Accounts Payable		30,000
	To record purchase of merchandise on credit.
Jun 21	Purchases	20,000
	Cash		20,000
	To record purchase of merchandise with cash.

On June 10, we know credit terms means we have not paid for it yet but will pay for it later (accounts payable) We are offered a 2% discount if we pay within 10 days but do not record it yet as we do not know if we will make the discount due date. On June 21, we paid with cash so we do not have credit terms since it has been paid.