Glossary
What is cost of goods sold (COGS)?
The cost of what you sold, not what you bought. Get it wrong and every sale can be billed correctly while the profit is still wrong.
Updated
In short
Cost of goods sold is the cost of the stock a business sold in a period, subtracted from sales to give gross profit. SimpleERP posts it on every invoice at weighted average cost, in the same step as the sale.
Cost of goods sold is the cost of the stock a business sold during a period, valued by its inventory method. It is subtracted from sales to give gross profit. The usual formula is opening stock plus purchases minus closing stock. A business that values its stock wrongly, or forgets to record cost when it sells, will report the wrong profit even if every sale is billed correctly.
Cost of goods sold (COGS): a worked example
Harbour Steel Furniture holds 20 steel racks costing $300 each ($6,000) and makes 30 more at $320 each ($9,600). The weighted average cost is $15,600 ÷ 50 = $312 a rack.
It then sells 10 racks to Riverside Stores at $499 each. Along with the sale, the invoice posts the cost:
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $3,120 | |
| Inventory | $3,120 |
Sales $4,990 less COGS $3,120 gives a gross profit of $1,870 on this invoice, and 40 racks remain in stock at $312 each.
FAQ
Questions, answered
Is COGS the same as purchases?
No. Purchases are what you bought in the period; COGS is the cost of what you sold. If you buy $100,000 of stock and sell half of it, COGS is about $50,000 and the rest sits in closing stock on the balance sheet.
Which costing method does SimpleERP use for COGS?
Weighted average cost. Each receipt of stock updates the average cost of that product, and each sale is costed at the average at that moment. It is accepted under IAS 2 and most national accounting standards and is simple to check by hand.
Do expenses like rent go into COGS?
For a trader, no: rent, salaries and power are operating expenses below gross profit. A manufacturer includes direct costs of making the goods, such as raw material and, where tracked, production labour, in the cost of finished goods, which then flows into COGS when they are sold.
Why is my gross margin different from what I expected?
Common reasons: stock received without a bill so its cost is missing, selling items that show negative stock, or discounts not reflected on invoices. Compare COGS per product with sales per product to find which line is off.
Related
Keep reading
Profit and loss statement
Income less expenses over a period, from sales to net profit.
Read moreJournal entry
A dated, balanced set of debit and credit lines with a reason.
Read moreWeighted average cost
How weighted average cost values stock and cost of goods sold, with the formula, a worked example and how it compares with FIFO.
Read more
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