When raw materials are used to create a final product, that product becomes a finished good. When that good is sold, the journal entry includes _______________ and ______________________. Select all that apply.1 pointCredit to cost of goods sold, Debit of inventory (finished goods)Debit to cost of goods sold, Credit to inventory (finished goods) Credit to cash/accounts receivable, Debit to sales incomeDebit to cash/accounts receivable, Credit to sales income
Question
When raw materials are used to create a final product, that product becomes a finished good. When that good is sold, the journal entry includes _______________ and ______________________. Select all that apply.1 pointCredit to cost of goods sold, Debit of inventory (finished goods)Debit to cost of goods sold, Credit to inventory (finished goods) Credit to cash/accounts receivable, Debit to sales incomeDebit to cash/accounts receivable, Credit to sales income
Solution
The correct answers are:
- Debit to cost of goods sold, Credit to inventory (finished goods)
- Credit to cash/accounts receivable, Debit to sales income
Here's why:
When a finished good is sold, the cost associated with producing that good is recognized as an expense, which is known as the cost of goods sold (COGS). This is recorded as a debit to the COGS account. At the same time, the inventory account, which represents the value of finished goods available for sale, is reduced by the same amount. This is recorded as a credit to the inventory account.
The sale of the finished good also generates revenue for the company. This is recorded as a debit to the sales income account. The corresponding credit entry depends on whether the sale was made on credit or for cash. If the sale was made on credit, the credit entry is made to the accounts receivable account. If the sale was made for cash, the credit entry is made to the cash account.
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