The Cost of Goods Sold sometimes
abbreviated to COGS or referred to as Cost of Sales, is the costs associated
with producing the goods which have been sold during an accounting period. The
items must have been sold otherwise there is no Cost of Goods Sold.
Cost of Goods Sold can equally refer to
a service as well as a physical product hence the uses of the more general term
Cost of Sales.
The costs included in Cost of Goods
sold are those necessary to bring the product to its present state and
condition prior to sale. They do not include selling expenses, distribution
costs, marketing etc such costs are termed costs of selling or selling
costs or sales and marketing costs.
For a manufacturing, retailing or
distribution business the cost of the goods sold refers to the physical product
and the costs of bringing it to the point of sale. This might include direct
material and labor costs, product costs, purchase returns and allowances,
purchase discounts, freight inwards (that is the costs of bringing the product
to your place of manufacture or distribution warehouse), and direct labor costs
and factory production overhead.
In a services business, the cost of
sales is more likely to be wages, salaries and personnel costs for staff
delivering the service, or perhaps subcontracting costs. It might include items
such as costs of research, photocopying, and production of presentations and
reports.
Why is Cost of Goods Sold Important?
In accounting, costs of sales or costs
of goods sold are subtracted from sales to calculate gross margin, so the
definition of Cost of Goods Sold determines the Gross Margin % of your business
and as a consequence important factors such as your Break Even Point.
How do you Record Cost of Goods Sold?
Cost of Goods Sold is calculated at the
end of an accounting period in relation to the items sold during that period.
What you record during the accounting
period are your normal accounting costs such as purchases of stock, wages,
salaries, factory overheads, carriage inwards. It is only at the end of the
accounting period that the calculation of Cost of Goods Sold is made.
Using a very simple (but unrealistic)
example. If you purchase for resale one item at 100 and the carriage costs to
deliver the item to your warehouse are 20 then the double entry would be as
follows:
|
Purchase of
products for resale
|
||
|
Account
|
Debit
|
Credit
|
|
Purchases
|
100
|
|
|
Carriage inwards
|
20
|
|
|
Accounts payable
|
120
|
|
|
Total
|
120
|
120
|
At this stage there has been no sale,
the costs are simply the costs of purchasing the product and the costs of
carriage, you have not recorded cost of goods sold as there have been no sales.
Suppose now the product is sold in the
same accounting period for £200, the costs are transferred to profit and loss
account via the cost of goods sold account as follows:
|
Transfer to Cost of
Goods Sold account
|
||
|
Account
|
Debit
|
Credit
|
|
Purchases
|
100
|
|
|
Carriage inwards
|
20
|
|
|
Cost of Goods Sold
|
120
|
|
|
Total
|
120
|
120
|
And the final income statement follows:
|
Income Statement
|
|
|
Sales
|
200
|
|
Cost of Goods Sold
|
120
|
|
Gross profit
|
80
|
|
Gross Margin %
|
40%
|
Comments
Post a Comment