A company uses a perpetual inventory system. At year end, the inventory account had a balance of $585,000, but a complete year-end physical inventory indicated goods on hand costing only $580,000. Which account should be credited for $5,000 to record this adjustment?

Rationale

Inventory should be credited for $5,000 to record this adjustment.

In a perpetual inventory system, discrepancies between recorded and actual inventory must be reconciled. The balance discrepancy of $5,000 indicates an overstatement in the inventory account, necessitating a credit to adjust the account to reflect the actual physical inventory value.

A (Purchases) YOUR ANSWER

Crediting the Purchases account would inaccurately reduce the expenses related to inventory acquisitions without addressing the overstatement in the inventory account. This option does not correct the discrepancy and fails to accurately reflect the company's inventory valuation.

B (Accounts payable) YOUR ANSWER

Adjusting the Accounts Payable account would imply a change in liabilities, which is irrelevant to the issue of inventory valuation. The discrepancies found in inventory do not affect the amounts owed to suppliers, so this choice does not address the necessary correction.

C (Cost of goods sold) YOUR ANSWER

While Cost of Goods Sold (COGS) reflects expenses related to inventory sold, crediting this account would not directly resolve the inventory overstatement. Adjustments to COGS are tied to sales activity rather than inventory valuation discrepancies, making this choice inappropriate for correcting the inventory balance.

D (Inventory) CORRECT

Crediting the Inventory account by $5,000 directly rectifies the overstatement, aligning the book balance with the actual physical inventory count. This adjustment accurately reflects the true value of goods on hand, ensuring the financial statements present a correct view of the company's assets.

Conclusion

The correct approach to address the $5,000 overstatement in the inventory account is to credit the Inventory account. This adjustment ensures that the accounting records accurately represent the actual goods on hand, which is essential for accurate financial reporting and analysis. The other choices do not address the issue of inventory valuation and would lead to further discrepancies in the financial statements.

A company uses a perpetual inventory system. At year end, the inventory account had a balance of $585,000, but a complete year-end physical inventory indicated goods on hand costing only $580,000. Which account should be credited for $5,000 to record this adjustment?

Inventory should be credited for $5,000 to record this adjustment.

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