Your COGS Expense account is increased by debits and decreased by credits. As a brief refresher, your COGS is how much it costs to produce your goods or services. COGS is your beginning inventory plus purchases during the period, minus your ending inventory. We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month. This includes purchase invoices, shipping records, and inventory records.

Specific Identification method:

For example, freight-in charges may be added to COGS, but only if specific criteria are met. Knowing the rules will help ensure auditors and business owners alike agree with the costs recorded for inventory. Your income statement includes your business’s cost of goods sold.

How to record cost of goods sold: COGS journal entry

In accounting, we usually need to make a journal entry to record the cost of goods sold after the sale of such goods or products if we use the perpetual inventory system in our company. When the company records its COGS as a journal entry, it would do so by debiting its COGS expense. It would then credit its purchases account by the amount of purchases made during the period, with the remaining balance becoming a credit for the inventory account. In order to prepare financial statements for your business, like an income statement and balance sheet, you’ll need to calculate your cost of goods sold (COGS).

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. In this example, the inventory balance increases by $15,000 compared to the previous year. Hence, we debit the $15,000 to the inventory account instead of crediting it. Let’s say you have a beginning balance in your Inventory account of $4,000. Along with being on oh-so important financial documents, you can subtract COGS from your business’s revenue to get your gross profit.

Journal entry to record cost of goods sold

Be sure to adjust the inventory account balance to match the ending inventory total. If you don’t account for your cost of goods sold, your books and financial statements will be inaccurate. Underreporting COGS, on the other hand, results in a higher gross profit and net income. This means underpaid income taxes and possible repercussions in case of an audit. It will also overstate profitability and hide inefficiencies that you should correct.

• As the cost of goods sold is a debit account, debiting it will increase the cost of goods sold and reduce the company’s profits.
• The following Cost of Goods Sold journal entries outline the most common COGS.
• Do physical inventory counts on a schedule to verify the accuracy of your inventory records.
• When prices are going up, FIFO (First-In, First-Out) results in lower COGS and higher net income.

Is cost of goods sold a debit or credit balance?

To avoid all kinds of trouble from incorrect profitability assumptions to IRS penalties, make sure your records are clean. Failing to make a costs of good sold journal entry for returns or unsellable goods can lead to inaccurate financial statements and overstated profits. This costs of good sold journal entry is basically a physical count of all inventory items.

If your business is service oriented and does not sell physical goods, you would calculate cost of sales (COS) or cost of revenue (COR) instead of COGS. Cash and credit purchases require a debit to Inventory and a credit to either Cash or Accounts Payable. Direct COGS are costs that are directly related to the production of the goods or services you sell. If you use accounting software, look for features that automate inventory transactions. If you are dealing with a unique situation, consider consulting with an accountant or professional bookkeeper.

Make sure that each costs of good sold journal entry is accurate so you’re not overreporting or underreporting COGS. Overreporting results in a lower gross profit and net income, which means higher income tax liability. It also gives you a distorted idea of your business’s profitability. Use the same inventory valuation method throughout each accounting period and from one period to the next.

When listed in the revenue section, it allows you to calculate gross margin before diving into expenses. It is useful to note that, unlike the periodic inventory system, we do not have the purchases account under the perpetual inventory system. When we purchase the inventory, the purchased amount will go directly to the inventory account. Similarly, when we make the sale, the inventory is immediately recorded as a decrease (credit) in the amount of its cost as it transfers to the cost of goods sold (debit) on the income statement.

When that inventory is sold, it becomes an Expense, and we call that expense the Cost of goods sold. In this method of valuation of inventory, the company values the cost of goods how to record cost of goods sold journal entry sold and closing inventory at a specific cost specially identified for a specific product. These are feasible in only certain industries such as car manufacturers, real estate businesses, furniture, and other on-demand manufacturers industries. For another example, assuming that we still use the periodic inventory system and we still have the beginning inventory of $50,000 on the previous year’s balance sheet.

Without knowing the reporting period, it’ll be impossible to perform the calculations that you need to in order to find your COGS. And the ending inventory is $10,000 ($50,000 – $40,000) less than the beginning inventory. This means that the inventory balance decreased by $10,000 compared to the previous year. Likewise, we can calculate the cost of goods sold with the formula of the beginning inventory plus purchases minus the ending inventory. When you purchase materials, credit your Purchases account to record the amount spent, debit your COGS Expense account to show an increase, and credit your Inventory account to increase it.

Knowing your business’s COGS helps you determine your company’s bottom line and calculate net profit. Simply put, COGS accounting is recording journal entries for cost of goods sold in your books. Yes, you can adjust for inventory count discrepancies, COGS calculations or journal entries, a change in inventory valuation method, etc. Opening inventory is the value of the inventory that you have on hand at the beginning of an accounting period. You need this as a starting point to calculate COGS and determine your profitability. An item damaged before it’s sold means a debit to an account specific to Loss from Damaged Inventory.

As a business owner, you may know the definition of cost of goods sold (COGS). But do you know how to record a cost of goods sold journal entry in your books? Get the 411 on how to record a COGS journal entry in your books (including a few how-to examples!).

Consider a company that starts the accounting period with a beginning inventory value of $45,000. During the period, the company spends an additional $10,000 on new inventory, and it ends the period with an ending inventory value of $35,000. In order to calculate and record your company’s COGS, you’ll first need to define your reporting period. Are you calculating COGS on a yearly, quarterly, or monthly basis?