a. In a true perpetual inventory system, cost of goods sold is not a calculated

Question

a. In a true perpetual inventory system, cost of goods sold is not a calculated number. Assuming that you are working in a perpetual inventory company and I tell you in the middle of year 2 that a mistake was made in calculating ending inventory on 12/31/year1 and 12/31/year 1 inventory was overstated by $45,000, what accounts are incorrect in the 12/31/year 1 financial statements? How do you correct this error on 7/10/year 2 assuming that your company issues monthly financial statements? Give journal entry.

Explanation / Answer

In case inventory is overstated then Trading account will show overstated gross profit. Therefore Trading account willbe affected if inventory is overstated.

Journal entry to correct the error will be as follows

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