Question

In a perpetual inventory system, the purchase of inventory is debited to:

1. Inventory

2. Cost of Goods Sold

3. Accounts Payable

4. Purchases

Answer 1

Perpetual inventory system aids in obtaining the inventory balance after every purchase. Unlike a periodic inventory system, vital inventory information is available on a real-time basis. With the advent of technology, this system has become increasingly popular due to its benefits as described above, as also enabling decision-makers to take key inventory decisions beforehand itself.

Under this system, no separate purchases account is maintained - all the purchases (and the incidental costs thereto) are directly debited to the inventory account itself. No separate purchase account is maintained. Balance in the inventory account at the end of the relevant period reflects the cost of inventory.

Therefore, basis the above description, the correct option is 1. Inventory.

(Note: COGS includes costs after purchase of inventory as well, hence is not an appropriate option, while accounts payable reflects the balance due to creditors for purchases, which is also not a relevant option in this case.)

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