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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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