Before close it is COGS; after close it is retained earnings

Where did the income effect go?

The correcting entry for an inventory error always has two sides: the balance-sheet side (Inventory, or Accounts Payable for a missed invoice) and the income side. The balance-sheet side is the same whenever the error is found. The income side depends on one question: have the books been closed?

• Before close, the income effect is still sitting in Cost of Goods Sold, so the correction goes to Cost of Goods Sold.
• After close, Cost of Goods Sold has been closed to Income Summary and on to Retained Earnings. The income effect now lives in Retained Earnings, so the correction goes there — and the prior year's comparatives are restated.

Re-hitting COGS after close would put a 2024 error into 2025's income statement, doubling the damage: 2025 would be wrong by 30,000 and 2024 would still be wrong in the comparatives.

Worked example — Boreal's $30,000 understatement, found twice

Found in January 2025, before the 2024 books close. Ending inventory was understated, which overstated COGS. Put the frames back and take the excess out of COGS:

Dr Inventory                     30,000
    Cr Cost of Goods Sold                30,000

The 2024 statements are then simply prepared correctly. No restatement, because nothing has been issued.

Found in March 2025, after close. The overstated COGS has already reduced 2024 net income and, through closing, retained earnings. Put the frames back and restore the equity that the error removed:

Dr Inventory                     30,000
    Cr Retained Earnings                 30,000

The 2024 comparatives in the 2025 statements are restated: inventory, COGS, net income and retained earnings all corrected, with a note explaining the restatement. Because 2025's opening inventory is now right, 2025 COGS will be right too; the self-correction no longer needs to happen.

The cut-off error, before close

The $18,000 of frames shipped FOB shipping point on 29 December (L2.5) were left out of both inventory and purchases. COGS was correct, so neither COGS nor Retained Earnings appears in the correction — the error was entirely on the balance sheet:

Dr Inventory                     18,000
    Cr Accounts Payable                  18,000

The temptation is to debit or credit Cost of Goods Sold because "it is an inventory error". Run the identity first: if COGS came out correct, COGS is not in the entry.

An overstatement, after close

Suppose instead that 2024 ending inventory had been overstated by $12,000 (frames counted twice) and the error is found after close. Overstated ending inventory understated 2024 COGS, overstated net income, and overstated retained earnings. Take the phantom frames out and take the phantom profit out of equity:

Dr Retained Earnings             12,000
    Cr Inventory                         12,000

The direction is the mirror of the understatement case. If you are unsure which way, write down what the error did to retained earnings (overstated → it must come down → debit) and the entry writes itself.