Which of the following journal entries correctly shows the effects of purchasing inventory on account?

• A. Debit Cash; Credit Inventory
• B. Debit Inventory; Credit Accounts Payable
• C. Debit Accounts Payable; Credit Inventory
• D. Debit Inventory; Credit Cash

Answer: (B)

Verified step by step guidance

1. Understand the transaction: Purchasing inventory on account means the company acquires inventory but does not pay cash immediately. Instead, it creates a liability (Accounts Payable) to pay later.
2. Identify the accounts involved: The two accounts affected are 'Inventory' (an asset account) and 'Accounts Payable' (a liability account).
3. Determine the impact on each account: Inventory increases because the company now owns more goods, and Accounts Payable increases because the company owes money for the purchase.
4. Apply the rules of debits and credits: An increase in an asset account (Inventory) is recorded as a debit, and an increase in a liability account (Accounts Payable) is recorded as a credit.
5. Write the journal entry: Debit Inventory and Credit Accounts Payable to reflect the increase in inventory and the corresponding liability.