Question

A business uses perpetual inventory method failed to record the purchase of inventory acquired on credit. The inventory and related creditors accounts should have been recorded but were not.

What will the effect this error will have on the following Assets, liabilities or Net Profit would one of the following be Understated / Overstated / No Effect

Explain your answer about the effect of the error on net profit. There is an assumption that purchased inventory remains unsold.

Answer 1

Under the perpetual inventory method, cost of goods sold is computed at the date of each sale. The purchase of inventories is recorded in inventory account and inventory account is reduced at the date of each sale.

The Cost of goods sold is correctly stated as the purchased inventory remained unsold. Inventory account is understated by not recording purchases, cost of goods sold will not be affected. So the net profit will be unaffected

The net profit will have no effect.