Cost of goods sold
Cost of goods sold, sometimes abbreviated as COGS or called "cost of sales".
The cost of goods sold (COGS) is any direct cost related to the production of goods that are sold or the cost of inventory you acquire to sell to consumers. It does not include overhead expenses related to the general operation of the business, such as rent. Cost of goods sold is reported on a company's income statement.
Cost of goods sold that measures the direct costs incurred in producing products that were sold during a period.
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The simplest way to Definition cost of goods sold is the cost of the merchandise that a retailer, distributor, or manufacturer has sold.
The cost of goods sold is the cost of the merchandise that a retailer, distributor, or manufacturer has sold.
Let me explain this definition, Let say a manufacturer has sold its merchandise to a wholesaler. Then the cost of the inventory for the Manufacturer become a cost of goods sold. But distributor or wholesaler who bought this merchandise. Then cost of the merchandise become a current asset for a wholesaler. When wholesaler will sell this merchandise to a retailer. Then the cost of the inventory for the wholesaler will become a cost of goods sold. This merchandise will become a current asset for the retailer.
After understanding the core concept of cost of goods sold. Now we are going to look the nature of cost of goods sold the account. Whether it an asset account or Expense account or Revenue account. The cost of goods sold in an expense account.
The cost of goods sold is reported on the income statement and can be considered as an expense of the accounting period. By matching the cost of the goods sold with the revenues from the goods sold, the matching principle of accounting is achieved.
The important point in this definition is that when anybody sale its inventory, then cost of the inventory will become a cost of goods sold only. Otherwise, it will remain as a current asset.
Cost of goods Sold Formula
Cost of goods Sold example
We have a lot of formulas to find Cost of goods sold. I will discuss with you one by one.
Gross profit is equal to sale less Cost of goods sold. Sometimes, we use this formula to calculate the cost of goods sold. We know that Cost of goods sold is equal to sale less gross profit.
Another formula, We use to calculate Cost of goods sold.
In this formula, Cost of goods sold is equal to opening inventory plus purchase less purchase returns less purchase discount plus freight-in less ending Inventory.
In the statement’s form, we will start with opening inventory plus with purchases and freight-in costs and less purchases returns and purchases discounts. When we will add net purchases with opening inventory the balance amount we will say the cost of goods available for sale. Then we less ending inventory with total and get cost of goods sold amount.
After the understanding, the cost of goods sold definition and formulas. Now, I will explain this important concept with the help of examples.
Let say a shopkeeper had bought 100 footballs for $30 each. One football player comes and bought 10 footballs for $50 each.
If we will calculate the cost of sale (COGS) for Shopkeeper as follows.
Sales (10 x 50)
Less: Cost of goods sold
(10 x 30)
When Shopkeeper will multiply 10 sales footballs with sale price $50. The shopkeeper will get sales amount $500. When shopkeeper will multiply 10 sale football with football cost $30. He will get the cost of goods sold amount $300. When sales amount $500 less cost of goods sold amount $300. We will get gross profit amount $200.
When the shopkeeper sales football to football player then cost the football become an expense and charge to cost of goods sold. The remaining 90 football keep in inventory. We know that inventory is also part of current assets. The current assets are shown on balance sheet only. So, the remaining 90 football cost will show on the balance sheet of the shopkeeper only.
Let me explain another example, XYZ a company has Beginning inventory $100,000, New purchases $450,000 and Ending inventory $35,000. Here is how to find the cost of goods sold for XYZ company.
In this situation, we will add Beginning inventory $100,000 with New purchases $450,000 and less Ending inventory $35,000. We will get the cost of goods sold amount $515,000.
Today, I will explain to you cost of goods sold definition, a core concept of cost of goods sold, and also explain with the help of examples.