Question

What account is debited when recording the adjusting entry to write down merchandise inventory under the LCM rule?

Short answer

What account is debited when recording the adjusting entry to write down merchandise inventory under the LCM rule?

Step-by-step solution

LCM Rule

LCM rule states that the inventory should be valued at lower of cost or net realizable value. This is based on the conservatism principle that states to record the items in the financial statement at the realistic value.

Accounts affected in the adjusting entry

Whenever any adjusting entry is made to adjust the cost to lower of cost or market value, there are two accounts used for making adjustments in the cost –

a) Cost of goods sold

b) Merchandise inventory

If the market value is less than the historic cost then the entry is required to be made. If the market value is higher than the historic cost then there is no need to make the adjustment as the inventory has already been recorded at the lower of cost or market value.