Cost of Goods Sold Journal Entry (COGS)

Journal Entry for Cost of Goods Sold (COGS)

The following Cost of Goods Sold journal entries provides an outline of 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 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.

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 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:

Cost of goods sold example 1

Now, these pens are purchased known as inventory because this is purchased with the intention to resale it.

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.

This is the Cost of goods sold.

Now, we need to adjust the inventory by the cost of goods sold.

Cost of goods sold example 1-3

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

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.

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 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

Points to Remember

  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 Balance, 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 for reflecting closing stock. That is an increase or decrease in stock value.
  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 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 –

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Comments

  1. kavitha says

    awesome explanation

    • Dheeraj Vaidya says

      Thanks for your kind words!

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