Cost Of Goods Sold Journal Entry (COGS)

Updated on April 16, 2024
Article byWallstreetmojo Team
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Cost Of Goods Sold Journal Entry (COGS)?

Recording journal entries for the cost of goods sold is an important step in the preparation of financial statements. The various steps of recording the same helps in identifying all the direct cost that are associated with the manufacturing process of goods and services.

What Is Cost Of Goods Sold Journal Entry (COGS)

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It includes items like expenses for raw materials, direct labor, manufacturing overhead like rent, electricity bill, cost of distribution or transportation of goods and services to the customers and any other associated costs. It is essential to arrive at the actual figure of gross profit and later on use it to prepare the financial statement.

Cost of Goods Sold Journal Entry Explained

The journal entries for cost of goods sold refers to the accounting entries that are done in the books of accounts in order to clearly maintain records of various transactions related to the same. This is very useful for the purpose of maintaining transparency, accountability and is used in preparation of financial statements and reports.

Another purpose of studying the correct way to enter the cost of goods sold related transactions in the books is that they provide support during audit procedures. These transactions related to cost of goods sold general journal entry, give a clear picture of the initial steps of production which is used to ultimately arrive at the profitability figure.

The following Cost of Goods Sold journal entries outline the most common COGSCOGSThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more. Inventory is the cost of goods 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. Inventory is goods ready for sale and shown as Assets on the Balance Sheet. When that inventory is sold, it becomes an Expense, and we call that expense the Cost of goods sold.

Sales Revenue – Cost of goods sold = Gross Profit.

Gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more can also be called Gross Margin.

  • Sales revenue is based on the Sales Price of Inventory sold.
  • Cost of goods sold is based on the Cost of inventory sold.
  • Inventory is based on the Cost of inventory in hand.

It is crucial for the company to control and manage the cost of goods sold so that the profit levels are maintained and inspite of growing competition in the market te company is able to sustain its operations successfully along with increase in customer base.

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Examples

Let us understand the process of recording journal entries of cost of goods sold with the help of a suitable example.

Example #1

Suppose we have purchased 100 pens for $25/- each, So the Journal entry for the above transaction will be:

Cost of goods sold example 1

These pens are now known as inventory because they are purchased with the intention of resale.

Thus it means, it is Inventory.

Cost of goods sold example 1-1

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.

Cost of goods sold example 1-2

Now we don’t have 60 pens in our inventory anymore.

60 pens at cost= 60*25 that is $1500.

It is the Cost of goods sold.

We need to adjust the inventory by the cost of goods sold.

Cost of goods sold example 1-3

The sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account.read more and cost of goods sold.

Gross Profit = Sales revenue – Cost of goods sold 300 =1800-1500

Or

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.

Example #2

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 inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more of $15000/-.

The cost of goods sold journal entry will be:

example 1-4

The formula for Cost of Goods Sold (COGS):

Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory

 Or

Cost of Goods Sold (COGS) = Opening Inventory + Purchase – Purchase return -Trade discount + Freight inwards – Closing Inventory.
example

From the above examples of cost of goods sold general journal entry we can clearly understand the method followed to record entries in the books related to COGS. It shows how we can identify the required items from financial statement and use them to record for the COGS so that it becomes easy to use it for analysis and evaluation later on.   

Cost Of Goods Sold Explained In Video

 

Points To Remember

So, here are some points to be kept in mind regarding accounting cost of goods sold journal entry, which is beneficial for accountants and individuals who want to understand the concept better.

  1. The cost of goods sold in a manufacturing business includes direct material, labor cost, product cost, allowances, freight inwards, and factory production overheadFactory Production OverheadFactory Overhead, also called Factory Burden, is the total of all the indirect expenses related to the production of goods such as Quality Assurance Salaries, Factory Rent, & Factory Building Insurance etc. read more.
  2. In Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more, only a purchase account is shown with years of the total purchase value, not the cost of goods sold.
  3. The Cost of Goods Sold Journal Entry is made to reflect closing stockClosing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more.  That is an increase or decrease in stock value while accounting cost of goods sold journal entry.
  4. The Cost of Goods Sold is deducted from revenues to calculate Gross Profit and Gross Margin.

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This article has been a guide to what is Cost Of Goods Sold Journal Entry. We explain the entries with some examples and mention some important points to remember. Here are the other articles in accounting that you may like –

Reader Interactions

Comments

  1. Martha says

    Thanks now having more understanding on cost of goods sold

  2. Martha says

    Thanks now having a clear picture on cost of goods sold

  3. Ambica says

    Thanks for detailed & clear explanation. Helpful!!

  4. David says

    the explanation is simple and clear well articulated

  5. kavitha says

    awesome explanation

    • Dheeraj Vaidya says

      Thanks for your kind words!

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