Shankar Company uses a perpetual system to record inventory transactions. The company purchases 1,500 units of inventory on account on February 2 for $60,000 ($40 per unit) but then returns 100 defective units on February 5.

Record the inventory purchase on February 2 and the inventory return on February 5.

February 2

Debit Inventory $60,000

Credit Cash/Accounts payable $60,000

February 5

When a return of the item purchased is done,

Debit Cash/Account payable $4,000

Credit Inventory $4,000

Explanation:

In the perpetual inventory system, any movement (sale or return or purchase) must be adjusted in the books once the item moves.

When an item is purchased, such purchase may be done by cash or on account, the entries required are

Debit Inventory

Credit Cash/Accounts payable

When a return of the item purchased is done,

Debit Cash/Account payable

Credit Inventory

Amount returned = $40 * 100

= $4,000