Question

Which of the following statements is correct regarding a perpetual accounting system?

1) A company derives its cost of goods sold by first computing its cost of goods available for sale.
2) When a sale is made an entry is recorded to increase the Cost of Goods Sold account.
3) Purchases of inventory are recorded in a Purchases account.
4) The Purchases account is closed into the Inventory account.

Answer 1

The correct statement is that in a perpetual accounting system, an entry is recorded to increase the Cost of Goods Sold account immediately when a sale is made. Inventory levels and COGS are continuously updated directly in the Inventory account, and there is no separate Purchases account to close into Inventory.

Step-by-step explanation:

The correct statement regarding a perpetual accounting system is that "When a sale is made an entry is recorded to increase the Cost of Goods Sold account." In a perpetual accounting system, inventory and Cost of Goods Sold (COGS) are continuously updated with each sale or return. Therefore, when a sale occurs, the system records two main transactions: First, it records the revenue from the sale, and second, it records the corresponding cost of the item sold by increasing the COGS account and decreasing the Inventory account.

It's important to note that a perpetual system does not utilize a Purchases account; instead, purchases of inventory directly increase the Inventory account. Furthermore, there's no need to close the Purchases account into the Inventory account, as would be required in a periodic inventory system, because all transactions are recorded in real-time in the Inventory account.