When correcting inventory errors, which accounts should be adjusted?

When correcting inventory errors, which accounts should be adjusted?

• A. Only the inventory account
• B. The inventory account and related accounts
• C. Only accounts payable
• D. Only revenue

Answer: (B)

When inventory errors occur, they affect both the balance sheet and the income statement because the cost of goods sold depends on the inventory balance. If the ending inventory is misstated, COGS and, in turn, net income are also misstated. Therefore correcting the error requires adjusting not just the inventory balance but also the related accounts that reflect the same cost flow. In a perpetual system, that usually means adjusting Inventory and the Cost of Goods Sold. For example, if ending inventory was overstated, COGS would be understated, so you would debit COGS and credit Inventory to bring both into proper alignment. In a periodic system, you’d adjust Purchases (or related accumulation) along with Ending Inventory as needed. The key point is that the correction touches the inventory account and the related accounts that carry the corresponding costs or effects on income.

When inventory errors occur, they affect both the balance sheet and the income statement because the cost of goods sold depends on the inventory balance. If the ending inventory is misstated, COGS and, in turn, net income are also misstated. Therefore correcting the error requires adjusting not just the inventory balance but also the related accounts that reflect the same cost flow. In a perpetual system, that usually means adjusting Inventory and the Cost of Goods Sold. For example, if ending inventory was overstated, COGS would be understated, so you would debit COGS and credit Inventory to bring both into proper alignment. In a periodic system, you’d adjust Purchases (or related accumulation) along with Ending Inventory as needed. The key point is that the correction touches the inventory account and the related accounts that carry the corresponding costs or effects on income.