(281) 247-0374 | info@eftexllc.com
Client LoginTax Forms

  • Home
  • Services
    • Tax Preparation and Planning
    • Tax Resolution
    • Expat Tax Preparation
    • Business Registration Services
    • Bookkeeping
    • Payroll
    • Advisory Services
    • Consulting for QuickBooks®
    • Training for QuickBooks®
  • Products
    • QuickBooks Online
    • QuickBooks Desktop
    • QuickBooks Enterprise Solutions
    • QuickBooks Point of Sale
    • QuickBooks Payments
  • Industries
    • Services
    • Construction
    • Medical and Health Care
    • Real Estate
    • Restaurant
    • Retail
    • Manufacturing
    • Wholesalers and Distributors
  • Resources
    • Resources
    • Tax Forms
  • Blog
  • Press
  • About
    • About Us
    • Our Value to You
    • Send Us Your Referrals
  • Contact
    • Contact
    • Tax Preparation Quote
    • Bookkeeping Questionnaire
  • Home
  • Services
    • Tax Preparation and Planning
    • Tax Resolution
    • Expat Tax Preparation
    • Business Registration Services
    • Bookkeeping
    • Payroll
    • Advisory Services
    • Consulting for QuickBooks®
    • Training for QuickBooks®
  • Products
    • QuickBooks Online
    • QuickBooks Desktop
    • QuickBooks Enterprise Solutions
    • QuickBooks Point of Sale
    • QuickBooks Payments
  • Industries
    • Services
    • Construction
    • Medical and Health Care
    • Real Estate
    • Restaurant
    • Retail
    • Manufacturing
    • Wholesalers and Distributors
  • Resources
    • Resources
    • Tax Forms
  • Blog
  • Press
  • About
    • About Us
    • Our Value to You
    • Send Us Your Referrals
  • Contact
    • Contact
    • Tax Preparation Quote
    • Bookkeeping Questionnaire

Understanding Cost of Goods Sold

July 18, 2019 In Accounting

The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.

Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.

When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.

Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.

In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses.

At any point in time, the cost of items you purchase are in two different accounts:

    1. The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
    2. The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.

It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.

If your inventory purchases have not been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, your accountant can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.

If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.

Monthly Archives

Categories

  • Accounting (23)
  • Accounting Software (2)
  • Blog (4)
  • Bookkeeping (1)
  • Bookkeeping Tips (5)
  • Business Development (12)
  • Business Growth (7)
  • Business Tips (60)
  • Cool Tech Tools (13)
  • Cost-Saving Tips (1)
  • Customer Service Tips (6)
  • Decision-Making Tips (2)
  • Expense Reduction Tips (4)
  • Finance Management (1)
  • Management Tips (8)
  • Marketing Tips (1)
  • Money Management (1)
  • Payroll Tips (2)
  • Personal Development (5)
  • Profitability Tips (9)
  • Tax (4)
  • Time Management Tips (4)

Sitemap

  • Home
  • Services
  • Industries
  • Blog
  • About Us
  • Contact

Contact Us

Tax Services, Bookkeeping Services and Services for QuickBooks®

Eftex Business Services, LLC
DBA Eftex Tax Solutions

24044 Cinco Village Center Blvd
Katy, TX 77494

(281) 247-0374 | info@eftexllc.com


Intuit, QuickBooks, and QuickBooks ProAdvisor are registered trademarks of Intuit Inc. Used with permission under the QuickBooks ProAdvisor Agreement.

Client Login & Tax Forms

Client Login Tax Forms

Copyright Eftex Tax Solutions, LLC. 2020 | Site Design by Accelerator Websites | Privacy Policy | Disclaimer

Want to manage your cash flow more effectively?
Sign up now and get our FREE report:

105 Ways to Speed Up Cash Flow in Your Small Business

Get the Free Report