Final answer:
An inventory asset is moved to the Cost Of Goods Sold account when a sale takes place, as per 'accrual accounting' principles. This accounting entry is critical for calculating a company's gross profit.
Step-by-step explanation:
You move an inventory asset to the Cost Of Goods Sold (COGS) account at the point of sale, which is when the ownership of the merchandise transfers from the company to the purchaser. This accounting process follows the accrual accounting principle, where expenses are matched with the revenues they help to generate.
On a company's income statement, the COGS account reflects the direct costs attributable to the production of the goods sold by a company. This includes the cost of the materials and labor directly used to create the product. It is a critical component in calculating a company's gross profit. To record COGS, the cost of inventory that was sold is removed from the inventory account, which is reported on the balance sheet, and then recorded as an expense on the income statement. For example, let's say a company sells a product for $100 that cost $60 to produce. The $60 would be recorded as a debit to the COGS account, reducing the inventory asset, and a credit to the Revenue account, increasing income.Therefore, when goods are sold, the inventory asset is transferred from the balance sheet to the income statement as a cost of goods sold.