Journal Entry for Cost of Goods Sold (COGS)
The following Cost of Goods Sold journal entries provides an outline of the most common COGS. Inventory is goods that are ready for sale and is shown as Assets in the Balance Sheet. When that inventory is sold, it becomes an Expense and we call that expense as Cost of goods sold. Inventory is the cost of goods which we have purchased for resale, once this inventory is sold it becomes the cost of goods sold and the Cost of goods sold is an Expense.
Gross profit can also be called Gross Margin.
- Sales revenue is based on the Sales Price of Inventory sold.
- Cost of goods sold based on the Cost of inventory sold.
- Inventory is based on the Cost of inventory in hand.
Journal Entries for Cost of Goods Sold Example
Suppose we have purchased 100 pens of $25/- each, So the Journal entry for the above transaction will be:
Now, these pens are purchased known as inventory because this is purchased with the intention to resale it.
Thus it means, it is Inventory.
Now suppose we have sold this inventory
Then two transactions take place
- First Sale of goods (pens).
- Second, losing inventory (pens).
Suppose we sold 60 pens at $30/- each.
Now we don’t have 60 pens in our inventory anymore.
60 pens at cost= 60*25 that is $1500.
This is the Cost of goods sold.
Now, we need to adjust the inventory by the cost of goods sold.
The sales revenue and cost of goods sold will be shown in the Income Statement.
Gross Profit = Sales revenue – Cost of goods sold 300 =1800-1500
Sales – Gross profit = Cost of goods sold 1800-300 = 1500.
So the cost of goods sold is an expense charged against Sales to work out Gross profit.
- Cost of goods sold formula does not include general expense such as salary,
Wages, advertising, etc. since it is a direct cost of the inventory that we have sold during the year.
COGS Journal Entries Example (with opening and closing inventory)
XYZ Limited has an opening inventory of $25000/-.The company has purchased goods of $55000/- from the supplier during the month and at the end of the month, the ending inventory of $15000/-.
The cost of goods sold journal entry will be:
The formula for Cost of Goods Sold (COGS):
Points to Remember
- The cost of goods sold in a manufacturing business includes direct material, labor cost, product cost, allowances, freight inwards and factory production overhead.
- In Trial Balance, only a purchase account is shown with years total purchase value not cost of goods sold.
- The Cost of Goods Sold Journal Entry is made for reflecting closing stock. That is an increase or decrease in stock value.
- The Cost of Goods Sold is deducted from revenues in order to calculate Gross Profit and Gross Margin.
This has been a guide to the Cost of Goods Sold (COGS) Journal Entry. Here we discuss the examples of Journal entries for the cost of goods sold with detailed explanation. Here are the other articles in accounting that you may like –