How to Account for Cost of Goods Sold

Accounting for the cost of goods sold (COGS) is an important aspect of managing the financial performance of a business. The COGS is the direct cost incurred in producing goods or services that have been sold by the business. To account for COGS, you should follow these steps:

1. Identify the Direct Costs: Identify the direct costs associated with producing goods or services. Direct costs include the cost of raw materials, labor costs, and other expenses directly related to production.

2. Determine the Cost of Goods Manufactured or Purchased: If the business manufactures the goods, determine the cost of goods manufactured. If the goods are purchased for resale, determine the cost of goods purchased.

3. Calculate the Cost of Goods Available for Sale: Add the cost of goods manufactured or purchased to the beginning inventory to determine the cost of goods available for sale.

4. Calculate the Cost of Goods Sold: Subtract the ending inventory from the cost of goods available for sale to determine the cost of goods sold. The ending inventory is the value of the goods that remain unsold at the end of the accounting period.

5. Record the Cost of Goods Sold: Record the cost of goods sold as an expense on the income statement. The cost of goods sold reduces the gross revenue and gross profit of the business.

6. Review and Analyze: Review the COGS to analyze the financial performance of the business. Monitor trends in COGS over time and compare it to industry benchmarks to identify opportunities for cost savings and improvements in operations.

By following these steps, you can effectively account for the cost of goods sold, which is essential for managing the financial performance of your business.