Chapter 5, Problem 5.5BE

To determine

Perpetual Inventory System: Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Adjusting entries: Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.

Accounting rules for journal entries:

1. a) To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
2. b) To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

To Record: Adjusting entry for Inventory in the books of L Company.