Hey, I have a test tomorrow and I don't quite understand what the cogs account is. Is it a perpetual-inventory only account or is it used in both the periodic and perpetual inventory systems? Also, does the cogs account increase on the debit side?

This is a side question but I also want to know what is the importance of cost of goods sold. All I know is that a merchandising business must buy and pay for the merchandise it sells and this is a major expense for merchandising companies. I also know it has a special attention in the income statement and in the chart of accounts, but that's all that I know.

Quote from SLAC - Accounting Review - Perpetual vs Periodic (http://www.accd.edu/sac/slac/ppointshows/acct/perpetual_periodic.htm)

"Periodic Inventory System:
Under the periodic inventory system, the company usually waits until the end of an accounting period to take a physical inventory; it does not maintain detailed records of physical inventory on hand during the period. The cost of goods sold is computed after a physical inventory is taken.

Perpetual Inventory System:
Under the perpetual inventory system, records are kept of the quantity and usually the cost of individual items of inventory throughout the year, as items are bought and sold. The cost of goods sold is recorded as goods are transferred to customers, and the inventory balance is kept current throughout the year, as items are bought and sold."

That should answer your first question.

Hopefully this answers your second one.

The cost of goods sold is: (adding all this together) (With the exception of the returns and discounts; I am not really sure if these are expense accounts or not someone correct me on this please.) [This is also changed a little bit for Perpetual systems because the cost of goods sold is recorded as goods are transferred to customers]
- Your beginning merchandise inventory up for sale to customers
- Purchases to restore and add to your merchandise inventory
- Shipping cost of the purchases
- Purchases you return do to defauts (get your money back)
- Purchases discounts (save some money on what you buy)

Subtract all of this with the ending merchandise inventory to find out how much it costed you to buy and put up for sale your merchandise and how much of it you sold (hence the name cost of goods sold)

The reason for this account is to find out how much profit you made from your sales after you bought all the materials to put your items up for sale.
(Formula)
Net Sales - Cost of Goods Sold = Gross Profit on Sales

I'm assuming you know this but I'll put it up here just in case. Sales are the merchandise you put up for sale at a higher price then it costed you so you can make a profit; then you have your Sales Returns and Allowances account for people who return some of the goods you sold them from defects or other reasons. Subtract your returns from your Sales and this gives you Net Sales.

*EDIT* Oh and I don't think that the COGS appears in the journals/ledgers, just the separate accounts that make up the COGS appear on there. COGS only shows up in the Income Statement I believe. Someone correct me if I am wrong please.

Thanks for your informative answer! I read this after my test so your response was a little bit late but the test was easy and I had a good understanding of the COGS questions. But I'm afraid because I made a really bad mistake during the test. We used a scantron sheet and the first part of the test consisted of true and false questions. It didn't specifically say that I should post these into the scantron, so I put it in the sheet. Then after the true and false section was complete, I had the multiple choice selection and I put those into the scantron sheet. The teacher came at the end of the test and asked me if I put the true and false answers in the scantron and I didn't. So I had to move all my answers down but I did it real quick. So I'm not sure if I hit the right answers on the scantron because the answer is either right or wrong. I'm afraid that I put my answers in the wrong blocks so I'm really worried :'(. Otherwise that, the test went well. I got this weird cogs question that I'm hoping someone would help me out on it.

The question was-Suppose you calculated your ending inventory and it totalled $2000 but you doubled it by accident and recorded $4000 of ending inventory in the books. How would this affect your income statement in the current fiscal period (net income overstated/understated etc)? How would it affect your income statement in the next fiscal period if you didn't correct the error?
I wrote that net income was overstated in the current fiscal period and it was understated at the next fiscal period. Can anyone confirm if I am right?

I'm sorry to hear that and hope that you did mark them right. (haha, I've done similar stuff)
The net income for that period would be overstated and for the next period I believe it wouldn't be affected because it's a whole new period.

But wouldn't the ending inventory be brought forward to the next fiscal period as beginning inventory? Since the beginning inventory would be larger, your cost of goods sold will be higher and your gross profit will then be lower. Hence your net income will be lower so your net income is understated.

Glad to see you caught that ;). I got ahead of myself when I wrote it I guess.

That answer just makes me more sad if all my multiple choice questions end up being in the wrong spot. If that does happen, would the teacher re-mark my scantron sheet if I prove her my situation?

What I would do is tell her the situation first if you know that your score is wrong do to the answers being marked wrong then if she doesn't buy it ask for a retake. Of course, she might not let you do to you might have memorized it. In the end you can just hope for the best. Best of luck serious7.