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BE5-3 Cha Company buys merchandise on account from Wirtz Company. The selling price of the goods is $780, and the cost of the goods is $470. Both companies use perpetual inventory systems. Journalize the transaction on the books of both companies.

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Answer:

In the books of Wirtz, the selling party, the required entries are

Debit Accounts receivable $780

Credit Revenue $780

Being entries to recognize sales revenue on account

Debit Cost of sales $470

Credit Inventory  $470

Being entries to recognize the cost of items sold

In the books of Cha Company

Debit Inventory $780

Credit Accounts payable  $780

Being entries to record cost of inventory purchased

Step-by-step explanation:

When a company makes a sale, the effect of such sale is dual in the books of the company being that the company would first recognize revenue and then recognize the cost of items sold.

To recognize revenue,

Debit Cash/Accounts receivable

Credit Revenue

To record the cost of the item sold

Debit Cost of sales

Credit Inventory

For the party that makes the purchase

Debit Inventory

Credit Cash/Accounts payable

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