Which Of The Following Is True Under The Perpetual Inventory System?

The correct option of this multiple choice question (mcq) is B, as under the Perpetual Inventory System (PIS), one entry is recorded for sales made for cash / bank or on account / credit and second entry is related cost of goods sold each time a sales occurs.

(i) Goods Sold For Cash Or On Account

The first entry to record is recorded for sales made either for cash / bank or on account as shown below:

 (a) For Cash / Bank (By Check)

                                                       Cash a/c / Bank a/c  XXX

                                                                                   Sales a/c  XXX

                                           (Goods Or Merchandise Sold For Cash / By Check)

In the above entry cash / bank account is increasing as the business received it or deposited check into its bank account, so we debit it while sales account is increasing as sales is created, so we credit it.

 (b) On Account / Credit

                                                   Accounts Receivable a/c  XXX

                                                                                        Sales a/c  XXX

                                         (Goods Or Merchandise Sold To Customers On Account)

In the above entry, the accounts receivables is increasing as the amount is due from customers against the goods sold, so we debit it while sales account is increasing and credited as a result.

(ii) Cost of Goods Sold (COGS) Entry

The second entry is related to cost of goods sold (cost of sales) as shown below:

                                             Cost of Sales a/c  XXX

                                                                           Inventory a/c  XXX

                                     (Cost Of Goods Sold Recorded To Adjust The Inventory)

Cost of sales is debited as it is incurred for selling goods to customers while inventory is credited as inventory are sold to customers and as a result goods in warehouse of the business is decreasing.

 The option A is incorrect choice here as under PIS, the value of inventory is adjusted every time a sales is made, so there is no need of physical counting of inventory.

The option C is also wrong choice as purchases are managed under inventory called inventory purchases account, so no separate purchases account is required.

The option D is not correct choice here as under PIS, sales return requires two entries. The first is to debit a sales return account and a credit to accounts receivables / cash or bank account to reverse the original sales. The second entry is to reverse cost of goods sold by debited inventory account and credited cost of goods sold account.