Assume Company ABC has a beginning balance in its Inventory account of $4,000. Say, the company purchase $1,000 worth of materials during the accounting period and at the end of the period, it counts $1,500 of ending inventory. Now, that we have an understanding of debit and credit entry as well as COGS; is cost of goods sold a debit or credit? According to the IRS, companies that make and sell products or buy and resell goods need to calculate COGS to write off the expense. You’ll want to use your spreadsheet software of choice to create a catalog like the one above for your own inventory. Take the data from whichever channels you’re selling on to input information about how many units you’ve sold over a given time period and how much each unit costs you.
Cost accounting methods usually vary from one industry to another. For instance, the cost of goods sold for a baker would be the cost of ingredients and labor if he/she has an assistant who helps produce the baked item for sale. Only the costs directly attributed to the sales are included in the COGS. Overhead costs such https://accounting-services.net/recording-a-cost-of-goods-sold-journal-entry/ as utilities, rent, or the cost of delivering a wedding cake (delivery van, gas, driver) would not be included in the calculation of COGS. Also, the costs incurred on the cars that were not sold during the year will not be included when calculating the COGS, regardless of whether the costs are direct or indirect.
Transactions are usually recorded in accounting as a debit or credit entry. For every transaction, an amount must be recorded in one account as a credit (right side of the balance sheet) and recorded in another account as a debit (left side of the balance sheet). This system is a double-entry accounting system that provides accuracy in accounting records and financial statements. When using a periodic system, cost of goods sold is computed as a prerequisite to preparing financial statements. The figure is then reported as the company’s cost of goods sold for the period. Because complete inventory records are not available, any units that are lost, stolen, or broken cannot be separately derived.
The legal conveyance of inventory from seller to buyer establishes the timing for recording and is based on the FOB point specified. This designation also identifies the party responsible for transportation costs and items damaged while in transit. In contrast, the recording of cost of goods sold depends on the inventory system used. For a perpetual system, the reclassification of an item from inventory to expense occurs at the time of each sale.
As an expense account, the cost of goods sold is increased by a debit entry and decreased by a credit entry. Therefore, when making a journal entry, the cost of goods sold is debited while purchases and inventory accounts are credited to balance the entry. Cost of goods sold is an expense account, so it is increased by a debit entry and decreased by a credit entry. When making a journal entry, COGS is debited and purchases and inventory accounts are credited to balance the entry. On the balance sheet, cash, inventory, and accounts receivable are considered asset accounts and therefore increase with debits. On the income statement, revenues are known to decrease with debits and increase with credits.
It is important to understand how each of these figures is derived. For example, a plumber offers plumbing services but may also have inventory on hand to sell, such as spare parts or pipes. To calculate COGS, the plumber has to combine both the cost of labor and the cost of each part involved in the service. When tax time rolls around, you can include the cost of purchasing inventory on your tax return, which could reduce your business’ taxable income. Knowing your initial costs and maintaining accurate product costs can ultimately save you money. Beyond that, tracking accurate costs of your inventory helps you calculate your true inventory value, or the total dollar value of inventory you have in stock.
If you’re interested in having us do your accounting with COGS and inventory for you, let us know. All you have to do is enter the cost for each SKU manually and then click the Review button. The blue Resend to QuickBooks button will push this information over to your account. We rave about A2X in several of our videos; it makes a whole lot of accounting processes much simpler.
The cost of revenue takes into account the cost of goods sold (COGS) or cost of services provided plus any additional costs incurred to generate a sale. Although the cost of revenue factors in many costs associated with sales, it does not take into account the indirect costs, such as salaries paid to managers.
And when tax season rolls around, having accurate records of COGS can help you and your accountant file your taxes properly. Determining the cost of goods sold is only one portion of your business’s operations. But understanding COGS can help you better understand your business’s financial health.