Cherokee Incorporated is a merchandiser. If the company purchases inventory on account for \$5,000, which of the following is the correct journal entry to record this transaction?

• A. Debit Cash \$5,000; Credit Inventory \$5,000
• B. Debit Inventory \$5,000; Credit Cash \$5,000
• C. Debit Inventory \$5,000; Credit Accounts Payable \$5,000
• D. Debit Accounts Payable \$5,000; Credit Inventory \$5,000

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. Cherokee Incorporated is purchasing inventory on account, meaning the company is acquiring goods but has not yet paid for them. This creates a liability (Accounts Payable) and increases the asset (Inventory).
2. Step 2: Recall the accounting equation: Assets = Liabilities + Equity. In this case, Inventory (an asset) increases, and Accounts Payable (a liability) also increases. Cash is not involved in this transaction since the purchase is on account.
3. Step 3: Determine the correct journal entry. When inventory is purchased, the Inventory account is debited to reflect the increase in assets, and the Accounts Payable account is credited to record the liability.
4. Step 4: Write the journal entry using proper accounting format: Debit Inventory \$5,000 (to increase the asset) and Credit Accounts Payable \$5,000 (to increase the liability).
5. Step 5: Verify the journal entry. Ensure that the debit and credit amounts are equal (\$5,000 each) and that the accounts affected align with the nature of the transaction (Inventory and Accounts Payable).