214-821-4144 | info@BridgeRightGroup.com

BridgeRight Group
  • Home
  • Services
    • Training for QuickBooks®
    • Bookkeeping
    • Forensic Bookkeeping Services
    • PPP Loan Forgiveness Assistance
    • Payroll
    • Payables Management
    • Sales Tax Automation
    • Advisory Services
    • Cash Flow Forecast
    • Consulting for QuickBooks®
    • Cloud Bookkeeping
  • Products
    • QuickBooks Online
    • QuickBooks Online Advanced
    • QuickBooks Payments
    • Gusto HR & Payroll
  • Industries
    • Professional Services
    • Nonprofit
    • Independent Pharmacies
    • Law Firms
  • Resources
  • Blog
  • About
  • Contact
July 18, 2019

Understanding Cost of Goods Sold

David Pattillo Accounting

The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.

Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.

When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.

Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.

In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses.

At any point in time, the cost of items you purchase are in two different accounts:

    1. The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
    2. The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.

It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.

If your inventory purchases have not been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, your accountant can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.

If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.

Mid-Year Review Five Key Reports for Your Business

Related Posts

Accounting, Accounting Software, Business Growth, Business Tips, Technology

5 Signs You Need to Upgrade Your Accounting System

Accounting, Cool Tech Tools

Mobile Accounting? It’s Here, Now

Accounting, Bookkeeping, Business Tips, Tax

Accounting Tasks at Year-End

Archives

  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • May 2017

Categories

  • Accounting
  • Accounting Software
  • Blog
  • Bookkeeping
  • Bookkeeping Tips
  • Business Development
  • Business Growth
  • Business Tips
  • Cool Tech Tools
  • Cost-Saving Tips
  • Cost-Savings Tips
  • Customer Service Tips
  • Decision-Making Tips
  • Expense Reduction Tips
  • Finance Management
  • Management Tips
  • Marketing Tips
  • News
  • Payroll Tips
  • Personal Development
  • Profitability Tips
  • Tax
  • Technology
  • Time Management Tips
  • Uncategorized

Sitemap

  • Home
  • Services
  • Products
  • Industries
  • Resources
  • Blog
  • About
  • Contact

Contact Us

Bookkeeping Services, Advisory Services, and Services for QuickBooks®

BridgeRight Group

214-821-4144 | info@BridgeRightGroup.com

4848 Lemmon Ave, Suite 100-785
Dallas, TX 75219

Client Portal


Intuit, QuickBooks, and QuickBooks ProAdvisor are registered trademarks of Intuit Inc. Used with permission under the QuickBooks ProAdvisor Agreement.
© BridgeRight Group 2021
Copyright BridgeRight Group | Site Design by Accelerator Websites