Alright, so let's dive a little more into the concept of cost of goods sold and consider a perpetual inventory system versus a periodic inventory system. So let's start here with the perpetual inventory system, and this is a system that updates the inventory account after each sale. Okay, so it's perpetually updating the account, right? And as of late, it's become a lot more used to have perpetual systems because of barcodes, right? So when you go to a store and they scan something out, that's going to be updating the inventory account based on what they sell, you know they're going to be taking it out of inventory. So the perpetual inventory system, it's going to make 2 entries when a sale is made. Okay? And let's see what those entries are right here. So, Things on Shelves company sells things on shelves, Mandy walks in and buys a thing for $15 the thing cost $5. So in a perpetual system, we're going to make 2 entries, one for the revenue and one for the cost of goods sold, alright?
So our revenue entry has to do with the sale to the customer, right? We sold something for $15 so we had revenue of $15, okay? And let's say that Mandy walked in and paid in cash, well we would have some sort of entry like debiting cash $15, right? We received $15, so cash is going to go up, and we are going to credit our revenue. Right? We earned revenue of 15. So revenues go up with a credit, so there we go. That's our entry: Debit cash 15, credit revenue 15. So that's our revenue entry.
Let's see the cost of goods sold entry, and you might have seen this before already when we started this discussion, and it would look something like this. We would debit cost of goods sold, COGS is how we usually abbreviate it and this is an expense account, right? This is what it cost us to buy this product that we sold to Mandy, right? So when we bought this product, it cost us $5 but we sold it to Mandy for 15. So the cost of goods sold is going to be that $5 right? So we're going to debit cost goods sold which is an expense account and it goes up with that $5 and we're going to credit inventory for those $5 right because that previously that thing that we sold to Mandy was sitting in inventory and now it's no longer there, right? We sold it to her, she owns it now so it's not in our inventory. We credit inventory to decrease it by those 5. I dropped my pen. Alright, so let's go ahead and see how this affects our accounting equation.
We see that cash went up by 15, right? Cash is up by 15, but inventory is down by 5 right? So our assets went up by a net amount of 10, right? They went up 15 and then down 5 for the inventory. Nothing happened with our liabilities, right? We don't owe anybody anything here, but our equity does change. Let me get out of the way. We're going to see that the revenue increases our equity by 15. And then the COGS, the expense account decreases our equity by the 5. So there you go. You can see that our equation stays balanced, right? Our assets went up by a net amount of 10 and so did our equity go up by a net amount of 10. Cool? So the main thing here with the perpetual inventory system is that we have these two entries: we have the entry for revenue and the entry for cost of goods sold. Cool? Now, let's compare that to the periodic inventory system in the next video.