Question

Overstatement of Purchases

Hurley's accountant recorded a purchase of merchandise for $9,000 in 2020 that applied to 2021. The physical inventory for 2020 was correctly stated. The company uses the periodic inventory method. The entry on December 31, 2021, to correct for this error, assuming that Harley has not closed the books for 2021, is:

Purchases	9,000
Retained Earnings		9,000

Question: Why is the purchase account debited for an overstatement of purchases? I thought the normal balance

for this account was a debit.

Answer 1

--The question says that $ 9000 of purchases for 2021 were recorded in 2020 and this is the error to be corrected.

--Hence the purchase got 'overstated' for 2020 (not for 2021)

--But, the entry to correct is for 2021. The purchase are infact 'understated' for the year 2021.

--Thats why the 'Purchase account' is debited to eliminate the error of UNDERSTATED purchases for 2021.

--Had the correcting entry been passed in 2020 (the year of overstated purchases), the Purchase account would have been CREDITED.