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ACCA Applied Knowledge · Financial Accounting · Inventories

At the year end, a company's closing inventory was counted at a cost of $48,000. The company uses a periodic inventory system. Which entry correctly records the closing inventory in the ledger accounts?

Closing inventory is recorded by debiting the inventory account in the statement of financial position and crediting cost of sales in profit or loss. This recognises the unsold goods as an asset and reduces cost of sales, so profit is not understated.

  1. ADebit Statement of profit or loss (cost of sales) $48,000; credit Inventory (SOFP) $48,000
  2. BDebit Inventory (SOFP) $48,000; credit Statement of profit or loss (cost of sales) $48,000Correct
  3. CDebit Inventory (SOFP) $48,000; credit Purchases $48,000 and debit Payables $48,000
  4. DDebit Purchases $48,000; credit Inventory (SOFP) $48,000

Explanation

Closing inventory is recognised as an asset by debiting the inventory account and crediting cost of sales (reducing the cost of goods sold). Option A reverses this and would increase cost of sales and omit the asset. Options C and D mix in purchases or payables, which are unrelated to the year-end count.

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