Cost of Goods Sold:Perpetual Inventory

Brian Krogol
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Alright so let's dive a little more into the concept of cost of goods sold and consider a perpetual inventory system versus a periodic inventory system. So let's start here with the perpetual inventory system. And this is a system that updates the inventory account after each sale. Okay so it's perpetually updating the account, right? And as of late it's become a lot more uh used to have perpetual systems because of barcodes, right? So when you go to a store and they scan something out that's gonna be updating the inventory account based on what they sell, you know, they're gonna be taking it out of inventory. So the perpetual inventory system, it's gonna make two entries when a sale is made. Okay And let's see what those entries are right here. So things on shelves company sells things on shelves, Mandy walks in and buys a thing for $15. The thing cost $5. So in a perpetual system we're gonna make two entries, one for the revenue and one for the cost of goods sold. Alright so our revenue entry Has to do with the sale to the customer, right? We sold something for $15. So we had revenue of $15. Okay and let's say that mandy walked in and paid in cash. Well we would have some sort of entry like debit in cash, $15, right? We received $15. So cash is going to go up And we are going to credit our revenue right? We earned revenue of 15. So revenues go up with a credit. So there we go, that's our entry debit cash 15. Credit revenue 15. So that's our revenue entry. Let's see the cost of goods sold entry. And you might have seen this before already when we started this discussion and it would look something like this, we would debit cost of goods sold Cogs is how we usually abbreviate it. And this is an expense account, right? This is what it cost us to buy this product that we sold to mandy. Right? So when we bought this product it costs us $5. But we sold it to mandy for 15. So the cost of goods sold is gonna be that $5. Right? So we're going to debit cost of goods sold, which is an expense account and it goes up with that $5. And we're going to credit inventory For those $5. Right? Because that previously that thing that we sold to mandy was sitting in inventory and now it's no longer there. Right. We sold it to her, she owns it now. So it's not in our inventory. We credit inventory to to decrease it uh by by those five. I dropped my pen. Alright, so let's go ahead and see how this affects our our accounting equation. We see that cash went up by 15. Right? Cash is up by 15, but inventory is down by five. Right? So our assets went up by a net amount of 10. Right? They went up 15 and then down five for the inventory. Nothing happened with our liabilities, right? We don't owe anybody anything here, but our equity does change. Let me get out of the way. We're gonna see that the revenue increases our equity by 15, 15, and then the Cogs, the expense account decreases our equity by the five. So there you go. You can see that our equation stays balanced, right. Our assets went up by a net amount of 10. And so did our equity go up by a net amount of 10. Cool. So the main thing here with the perpetual inventory system is that we have these two entries. We have the entry for revenue and the entry for cost of goods sold. Cool. Now let's compare that to the periodic inventory system in the next video.