Question

kretsmart company purchased inventory. the shipping costs were not included in the cost of inventory, so kretsmart has to pay the shipping costs separately in cash. the shipping costs are $500. assuming that kretsmart company uses a perpetual inventory system, which debit or credit is included in the journal entry necessary to record the cash payment of these shipping costs?

Answer 1

In a perpetual inventory system, Kretsmart Company should debit Freight-In or Shipping Expense for $500 and credit Cash for the same amount to record the cash payment of the shipping costs.

Step-by-step explanation:

When Kretsmart Company pays for shipping costs that are not included in the cost of inventory, the journal entry in a perpetual inventory system would involve debiting a relevant expense account and crediting the cash account. The entry would be:

• Debit to Freight-In or Shipping Expense account: $500
• Credit to Cash account: $500

This reflects that Kretsmart Company incurs an expense and pays it in cash, decreasing the company's cash balance while recording the expense related to attaining inventory. It's important to note that in a perpetual inventory system, shipping costs directly related to the acquisition of inventory might be added to the inventory cost. However, if they are recognized as a separate expense, as in this case, they would not be capitalized.