Final answer:
When recording a sale of merchandise using a perpetual inventory system, a company records the Cost of Goods Sold (CGS) on the income statement and a corresponding decrease in its inventory on the balance sheet.
Step-by-step explanation:
Using a perpetual inventory system, when a company records a sale of merchandise, it must also record Cost of Goods Sold (CGS), which will be reported on the income statement, and a decrease in its inventory.
The perpetual system continuously updates inventory records, which typically include both a deduction for the inventory that is sold and the recording of cost of goods sold. CGS reflects the direct costs attributable to the production of the goods sold by a company, and when an item is sold, the cost associated with that inventory is moved to the income statement under CGS, thereby reducing the inventory asset account on the balance sheet (BS).