Multiple Choice
Under both the perpetual and periodic inventory systems, what type of account is the Cost of Goods Sold (COGS) account classified as?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
In both perpetual and periodic inventory systems, Cost of Goods Sold (COGS) is classified as which type of account?
A
Expense account
B
Asset account
C
Liability account
D
Revenue account
Verified step by step guidance1
Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company, including materials and labor. It is a key component in determining gross profit.
Recall the classification of accounts in financial accounting: Accounts are generally classified into assets, liabilities, equity, revenue, and expenses.
Analyze the nature of COGS: Since COGS represents costs incurred to generate revenue, it is not an asset, liability, or revenue account. Instead, it is classified as an expense account because it reduces the company's net income.
Compare COGS in perpetual and periodic inventory systems: In both systems, COGS is treated as an expense account. The difference lies in how COGS is calculated—perpetual systems update COGS continuously, while periodic systems calculate it at the end of the accounting period.
Conclude that COGS is classified as an expense account in both perpetual and periodic inventory systems, as it reflects the cost of goods sold during the period and impacts the income statement.
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