Warnerwoods Company uses a perpetual inventory system. When the company sells inventory to a customer, which of the following journal entries is required to record the cost of goods sold?

• A. Debit Purchases; Credit Inventory
• B. Debit Cost of Goods Sold; Credit Purchases
• C. Debit Cost of Goods Sold; Credit Inventory
• D. Debit Inventory; Credit Cost of Goods Sold

Answer: (C)

Verified step by step guidance

1. Understand the perpetual inventory system: In this system, inventory records are updated continuously to reflect purchases and sales. When inventory is sold, the cost of goods sold (COGS) is recorded immediately, and the inventory account is reduced.
2. Identify the accounts involved: The cost of goods sold (COGS) account represents the expense incurred for the inventory sold, while the inventory account represents the value of goods available for sale.
3. Determine the correct journal entry: When inventory is sold, the company needs to debit the Cost of Goods Sold account to record the expense and credit the Inventory account to reduce the value of inventory.
4. Analyze why other options are incorrect: For example, 'Debit Purchases; Credit Inventory' is incorrect because purchases are not debited in a perpetual system; inventory is updated directly. Similarly, 'Debit Inventory; Credit Cost of Goods Sold' reverses the correct entry and does not reflect the reduction in inventory or the expense incurred.
5. Write the journal entry: The correct journal entry is 'Debit Cost of Goods Sold; Credit Inventory,' which reflects the expense and reduction in inventory value due to the sale.