Journal Entries for Cost of Goods Sold (COGS)

Journal Entries for Cost of Goods Sold (COGS)

Most companies that involve in selling merchandises and products cannot get away with the calculation of the cost of goods sold. After figuring out the amounts associated with it, business owners need to record them in the books of accounts of the company. This task is something challenging for those who are not familiar with accounting because if they use a wrong method to record their inventories, the financial statements generated based on the incorrect entries will not be able to present the company’s financial position accurately. One of the best ways to solve this problem is by hiring a bookkeeping firm in Singapore, particularly if your business is still in its initial state and cannot afford to hire an in-house accountant.

The cost of goods sold (COGS) refers to the sum of direct cost that the company has incurred regarding the goods or services that the company sells. This cost includes all the direct costs, for example, direct labour costs, cost incurred to purchase raw materials, and so on. However, the cost of goods sole does not consider indirect expenses.

Inventories are the goods that are ready for sale. They appear in the asset section of the company’s balance sheet. The cost of inventories is the expense that the company has incurred to buy the goods for resale. As soon as the company has sold the inventories, that expense will become the cost of goods sold, and it is an expense. To calculate the cost of goods sold, one should deduct the gross profit earned from the company’s sales (Also see Skills that Every Sales Team Should Master) revenue.

Now, let us have a look at the journal entries for the cost of goods sold.

As an instance, ABC Bookstore has bought 150 reference books, and each of them cost RM10. So, the journal entries that the accountant should record is to debit RM1500 into the purchase account and credit the cash account with the same amount. As ABC Bookstore bought these books intending to resell them, it should include them into its inventory system. Thus, the bookstore will have 150 reference books as its inventories.

Then, ABC Bookstore has sold 100 reference books with the price of RM12 each, and the revenue that it has earned will be RM1200. To record this transaction, the accountant should debit the cash account with RM1200 and credit the sales account with the same amount. The number of reference books in the inventory system has decreased by 100, and the cost associated with these books is RM1000 (100 x RM10). This cost is the cost of goods sold, and ABC Bookstore should adjust the inventories (Also see What is Included in Your Inventory Cost?) it owns by this amount.

The profit and loss statement of ABC Bookstore will show the cost of goods sold as well as the sales revenue. To calculate the gross profit, the accountant will deduct the cost of goods sold from the sales revenue. In this case, the gross profit that ABC Bookstore has earned is RM200 (RM1200 – RM1000).

There is another formula for cost of goods sold too. To calculate the cost (Also see The Importance of Cost Accounting) of goods sold, the accountant will sum up the opening inventories and the purchases, less closing inventories. In the example above, suppose ABC Bookstore has just started the business and do not own any inventories previously, its opening inventories will be zero. Then, the purchase that it has made was RM1500 (bought 150 reference books with RM10 each), and the closing inventories were RM500 since it has sold 100 books during the year. Thus, the cost of goods sold for ABC Bookstore is RM1000 (RM0 + RM1500 – RM500).

The journal entries for the cost of goods sold help in reflecting the closing stock that a company owns. Hence, business owners get to know whether the stock value has increased or decreased. Also, they will be able to calculate the company’s gross profit as well as gross margin (Also see Guide to Marginal Cost) by deducting the cost of goods sold from the revenues.

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