Direct cost assigned to the inventory items sold during a period, reported against revenue on the income statement.
Cost of goods sold, often shortened to COGS, is the cost assigned to inventory items that were sold during the reporting period. It appears on the income statement as the direct cost of generating product sales.
COGS has a direct effect on gross profit and gross profit margin. Small errors in inventory counts, valuation methods, or cutoff can flow straight into reported profit.
When inventory is purchased or produced, the cost stays on the balance sheet as an asset until the related goods are sold. At sale, the inventory cost moves out of inventory and into cost of goods sold. The exact amount depends on the inventory-costing method and the quality of the inventory records.
A retailer sells goods for 9,000 that originally cost 5,400:
Sale entry:
| Account | Debit | Credit |
|---|---|---|
| Cash or Accounts Receivable | 9,000 | |
| Revenue | 9,000 |
Cost transfer entry:
| Account | Debit | Credit |
|---|---|---|
| Cost of Goods Sold | 5,400 | |
| Inventory | 5,400 |
The first entry records the sale. The second moves the product cost from the balance sheet into expense.
COGS is not the same as all operating expenses. Selling, general, and administrative costs usually sit below gross profit rather than inside cost of goods sold.