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Business Financials – How to understand Cost of Sales / Cost of Goods Sold

Business Financials – How to understand Cost of Sales / Cost of Goods Sold 

To understand business finance, the Cost of Sales (COS) or Cost of goods sold (COGS) is the cost of the product that was sold to customers. It usually includes the cost of materials and direct labour used to produce the goods so they are ready to sell.

The cost of the goods sold is reported on the profit and loss at the time/period that the sales of the goods sold are reported (when invoiced if accrual, or cash receipt if cash reporting).

A retailer's cost of goods sold includes the cost from its supplier plus any additional costs necessary to get the product into inventory and ready for sale.

For example, a store purchases a book from a publisher. If the cost from the publisher is $60 plus $5 in delivery costs, the store reports $65 cost per book in its Inventory Account until the book is sold. When the book is sold, the $65 is removed from inventory and is reported as cost of goods sold on the profit and loss at the time of the sale.

COGS is usually the largest expense on the profit and loss of a company selling products or goods.

Cost of Goods Sold are deducted from the sales/revenue.

Cost of goods sold is calculated in full, as follows:

cost of beginning inventory + cost of goods purchased (net of any return stock) + freight-in - cost of ending inventory

This COGS account balance or this calculated amount will be deducted from the sales amount on the Income Statement or Profit and Loss, leaving a Gross Profit.

Business Financials – How to understand Cost of Sales / Cost of Goods Sold

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Xero Bookkeeping – How to handle overpayment in Xero, and how to refund overpayment

images/xero icon.pngTo handle customer overpayment in Xero can be takes a couple of steps.

Let’s take a look at a few ways we can record an overpayment and apply this to an invoice/bill or refund it directly. In Xero, the term “invoice” relates to a sale, and a “bill” relates to a purchase. I’ve only referred to invoices below, but these processes relate to both sale invoices and purchase bills.

3 Ways to Record (handle) an Overpayment, you can either:

  • Simply enter the amount that was paid to you  (or you over paid), directly onto the invoice or bill payment at the bottom and if the amount exceeds the total, Xero will automatically calculate an Overpayment transaction.
  • Create an Overpayment Receive Money / Spend Money transaction in your bank account
  • During reconciliation, create an Overpayment Receive Money / Spend Money transaction

Allocate or Refund Overpayment to Customer (Resolve the overpayment)

Once the Overpayment transaction has been entered into Xero, a cash refund can be recorded or you can allocate the overpaid amount to an invoice for the same Contact in Xero.

  • The Allocate option will appear in the Overpayment Options drop down menu while viewing your Overpayment transaction.
  • If a contact has a new invoice you created Xero will ask if you wish to allocate the overpaid amount against this invoice.
  • You can record Cash Refunds on the Overpayment directly and then reconcile them with your Bank Statement line.

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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