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Cost of Goods Sold

The cost of goods sold which is also referred to as cost of sale is the cost of the goods that are sold to customers. Cost of goods sold of a manufacturing company is arrived at by adding the cost of goods manufactured to the opening stock of finished goods less closing stock of finished goods. In the retailing business, the total of the opening stock of goods and the net cost of goods purchased less the closing stock of goods will give the cost of goods sold. Both opening and closing stock figures which are calculated at cost affect the cost of goods sold.

Example: Cost of Goods Sold/Cost of Sales = Opening Stock + Purchases – Closing Stock


1st year of trading 2nd year of trading

$ $
Opening stock (at start of year) - 1,800
Add: Purchases 4,600 5,000
Total goods available for sale 4,600 6,800
Less: Closing stock (at end of year) 1,800 2.100
Cost of goods sold 2,800 4,700


Journal entries:

Year 20X1

Date Accounts Folio Debit Credit



$ $
20X1



Dec 31 Cost of Goods Sold
4,600

Purchases

4,600

(Transfer of year's purchases)







Dec 31 Stock
1,800

Cost of Goods Sold

1,800

(Transfer of closing stock)







Dec 31 Trading Account
2,800

Cost of Goods Sold

2,800

(Transfer cost of sale to Trading Account)



Year 20X2

Date Accounts Folio Debit Credit



$ $
20X2



Dec 31 Cost of Goods Sold
5,000

Purchases

5,000

(Transfer of purchases)







Dec 31 Cost of Goods Sold
1,800

Stock

1,800

(Transfer of opening stock)







Dec 31 Stock
2,100

Cost of Goods Sold

2,100

(Transfer of closing stock)







Dec 31 Trading and Profit and Loss
4,700

Cost of Goods Sold

4,700

(Transfer cost of sale sold)



Postings to accounts from above journal entries:

Cost of Goods Sold Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Dec 31 Purchases
4,600
Dec 31 Closing stock
1.800



Trading account 2,800
4,600 4,600
20X2 20X2
Dec 31 Opening stock 1,800 Dec 31 Closing stock 2,100
" Purchases 5,000 " Trading account 4,700
6,800 6,800


Stock Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20X1 20X1
Dec 31 Cost of Goods Sold
1,800 Dec 31 Balance c/d
1.800
1,800 1,800
20X2 20X2
Jan 01 Balance b/d
1,800 Dec 31 Cost of Goods Sold
1,800
Dec 31
Cost of Goods Sold
2,100 " Balance c/d
2,100
3,900 3,900


Trading Account for the year ended 31 December 20X1


$
$
Cost of Goods Sold 2,800 Sales 4,300
Gross Profit c/d 1,500


4,300
4,300


Gross Profit c/d 1,500


Trading Account for the year ended 31 December 20X2


$
$
Cost of Goods Sold 4,700 Sales 6,500
Gross Profit c/d 1,800


6,500
6,500


Gross Profit c/d 1,800


The cost of goods sold is a debit item on the income statement while revenues from the goods sold are a credit item on the same statement. The difference between these cost and revenues is either gross profit or loss.

Income statement for the year ended 31 December 20X1 / 20X2

20X1 20X2
Sales 4,300 6,500
Cost of Goods Sold:
Opening stock - 1,800
Purchases 4,600 5,000
4.600 6,800
Less: Closing stock 1,800 2,800 2,100 4,700
Gross Profit 1,500 1,800

General, administrative and selling expenses are not taken into consideration when calculating the cost of sales. Only those costs that are directly related to inventory are added to the cost of the inventory. They include freight costs that are incurred in getting the goods to the storage area and warehousing overheads such as rent, electricity and insurance, and those expenses that make the goods saleable. The items already in inventory will continue to maintain their costs even if their prices have increased. In other words, their costs cannot be increased to be the same as the new prices.

As an example, a trader bought 100 widgets for $100 and the freight charges and other costs are $40. The total inventory value would be $140. When a unit is sold, the amount deducted from the inventory account is $1.40 which will appear as cost of goods sold on the income statement. The cost of goods sold is a debit item on the income statement while revenues from the goods sold are a credit item on the same statement. The difference between the two sides is either a gross profit or loss. The excess of revenues over costs is gross profit.

Last Updated (Friday, 03 September 2010 18:07)