Can a counterbalancing error occur in inventory if a perpetual inventory system is used by the company?
Answer Counterbalancing errors, by definition, are errors that will correct themselves within a two-year period. One of the more common types of counterbalancing errors is when a company uses a periodic inventory system, and the ending inventory count is inaccurate. Since ending inventory is used to calculate cost of goods sold in a periodic system, the error in ending inventory causes an equal but opposite error in cost of goods sold for that year. And since ending inventory in one year becomes beginning inventory in the next year, and beginning inventory is used to calculate cost of goods sold in that next year, the error “flows through” in the second year. Under at perpetual system, the ending inventory determined by an inventory count is used to confirm the ending inventory recorded by the accounting system. If the two figures are materially different, the company examines both the count and the perpetual inventory records to try to isolate the difference. As well, cost of goods so
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