Perpetual Inventory System:
Cost of Goods Sold
Perpetual Inventory In a Nutshell
Unlike a Periodic Inventory system, where the Inventory account is commonly updated or adjusted at the end of the year, perpetual inventory systems are continuously updated. The Inventory account itself is increased with actual costs from purchased merchandise (from suppliers). The account is reduced as merchandise is sold to customers. In this model, there is no need to create purchases accounts.
Perpetual Inventory System Cost of Goods Sold
The perpetual inventory system DOES require a Cost of Goods Sold (COGS) account which is debited at upon each sale transaction for the true cost of the merchandise sold.
The perpetual inventory system creates two journal entries for each sale:
records the sale and the cash or accounts receivable
reduces inventory and increases COGS