When are the costs of goods sold recorded in a perpetual inventory system?
The correct answer and explanation is:
In a perpetual inventory system, the costs of goods sold (COGS) are recorded immediately after a sale is made. This system continuously updates inventory levels and records the cost of the items sold in real-time, as each transaction occurs.
When a sale takes place, two key entries are made: one to record the revenue from the sale and the other to record the COGS. The COGS is determined by the cost of the specific inventory items sold, which is tracked continuously through the system. This contrasts with the periodic inventory system, where COGS is recorded at the end of an accounting period after inventory counts and adjustments are made.
The perpetual system uses detailed records of inventory, allowing businesses to know the exact quantity and cost of each item on hand at any given moment. When a sale is recorded, the corresponding inventory is adjusted, and the cost of that specific inventory item is moved from the inventory account to the COGS account. This system provides real-time insights into both sales and inventory levels, making it easier to monitor inventory turnover, manage stock levels, and maintain accurate financial reporting.
For example, if a company sells an item that cost $50 to produce, the sale price of the item is recorded as revenue, and the COGS of $50 is recorded immediately, reducing the inventory balance. The perpetual system is commonly used by businesses with high transaction volumes or those requiring up-to-date inventory information, such as retail stores or warehouses. This system offers more accurate financial reporting and is often preferred for businesses with more complex inventory management needs.