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Expenses: Cost of Goods Sold

Updated: Sep 1, 2019

Cost of Goods Sold are Expenses found on the Income Statement/Statement of Financial Position. Cost of Goods Sold refers to direct costs that were incurred in the production of goods that were sold during the period. It is important to note that this does not include the cost of all goods produced -> only the proportion of goods that have been sold are included in the Cost of Goods Sold.

Costs should include only Direct Costs attributable to the production of goods:

  • Raw Materials used

  • Direct Labour costs (usually costs of operators and production plant supervisors)

  • Production Overheads

  • Electricity and other utilities directly attributable to the production facilities

  • Rent on the property used for production

  • Depreciation on machinery and the property used for production

Costs EXCLUDED from the Cost of Goods Sold:

  • General Management salaries

  • General Administrative Salaries

  • Sales staff costs

  • Head office rent (unless the head office is the production plant)

  • Utilities at the head office (unless the head office is the production plant)

  • Anything not directly related to the production of goods

An example journal entry associated with Cost of Good Sold can be found below.

When a sale for Cash is made, we record the Cash and Revenue:

We also need to record the loss of Inventory (found on the Balance Sheet/Statement of Financial Position), which becomes an Expense (Cost of Goods Sold) for the entity.

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1 Comment

Amanda White
Amanda White
Mar 21, 2022

Hi! I think this article could be improved by adding in the formulas for COGs. Here they are and here's the citation for where I found them!

COGS=COGS Account 1 + COGS Account 2… etc. Gross Profit=Revenue – COGS Net Income=Gross Profit – Operating Expenses (ie. Overhead Expenses) Thanks for all of the great content on this site - hope this is helpful to others!

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