Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a

a. debit to Cash

b. credit to Customer Refunds Payable

c. debit to Merchandise Inventory

d. credit to Merchandise Inventory

C

Explanation:

Inventory falls within the definition of assets and all assets are increased with debits and decreased with credits. With a perpetual inventory system, all inventory purchases are debited to the merchandised inventory account and when the goods are sold, the merchandised inventory account will be credited with the cost price. As soon as merchandise are returned, the inventory will increase again. To give a practical example when a store has two items of a specific shirt; if a customer returns another one that was bought yesterday, the store will now have three of the shirts on hand. Thus a return of merchandise previously sold, will result in a debit to merchandise inventory.