Under a perpetual inventory system, a shortage in inventory requires an adjusting entry that
A) debits Cost of Goods Sold and credits Accounts Payable.
B) debits Merchandise Inventory and credits Cost of Goods Sold.
C) debits Cost of Goods Sold and credits Merchandise Inventory.
D) debits Accounts Payable and credits Merchandise Inventory.
E) debits Accounts Payable and credits Cost of Goods Sold.

Question

Quizplus · Accepted Answer

In a perpetual inventory system, the inventory account is continually updated as goods are purchased and sold. A shortage in inventory indicates that more goods have been sold than what was assumed to be available, therefore resulting in a decrease in inventory. To reflect this, Cost of Goods Sold (an expense account) is debited and Merchandise Inventory (an asset account) is credited in the adjusting entry. Choice A, D, and E are incorrect because they do not reflect a decrease in inventory. Choice B is incorrect because it would result in an overstatement of inventory and understatement of the Cost of Goods Sold.

Under a Perpetual Inventory System, a Shortage in Inventory Requires