How to Record Cost of Goods Sold: COGS Journal Entry

Costs of goods sold vary as the number of finished products increase or decreases. Where this information lives will depend on the systems that your business uses. Be sure that you are valuing your inventory properly, according to whatever inventory accounting method your business uses. Use the same inventory valuation method throughout each accounting period and from one period to the next. Do physical inventory counts on a schedule to verify the accuracy of your inventory records.

If you still have questions about how you should be recording COGS, consider the following questions.
You need this as a starting point to calculate COGS and determine your profitability.
The amount of inventory in the above journal entries is the difference between the beginning inventory balance and the ending inventory balance.
If you use accounting software, look for features that automate inventory transactions.

However, the ending inventory how to record cost of goods sold journal entry is determined to be $65,000 instead. We had a beginning inventory of $50,000 which was shown on last year’s balance sheet. And during the year, we have made a total of $200,000 in purchases.

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In this journal entry, the credit of $10,000 in the inventory account comes from the balance of the beginning inventory ($50,000) minus the balance of the ending inventory ($40,000). And the purchases account of $200,000 will be cleared to zero when we close the company’s accounts at the end of the accounting period. However, if we use the periodic inventory system, we usually only make the journal entry to record the cost of goods sold at the end of the accounting period. And this is usually done in order to close the company’s accounts at the end of the period after taking the physical count of the ending inventory.

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. The basic costs of good sold journal entry for inventory purchases involves a debit and a credit. You debit the Inventory account and credit the Cash account for cash purchases or Accounts Payable for purchases on credit.

As explained, the debit cost of goods sold will increase the cost of goods sold in the income statement, and credit to finish goods will decrease the balance of finished goods in the balance sheet. Below is the explanation of how the cost of goods sold is recorded in the form of double entries in the company management account or financial statements. Meanwhile, with Ramp’s accounts payable software, you can eliminate manual data entry, automate payments to vendors and suppliers, and close your books faster than ever. Under the periodic inventory system, we usually need to take the physical count of the ending inventory before we can determine and record the cost of goods sold to the income statement. You only record COGS at the end of an accounting period to show inventory sold. It’s important to know how to record COGS in your books to accurately calculate profits.

Of course, the counting may still be done to verify the actual physical count with the accounting records. This entry matches the ending balance in the inventory account to the costed actual ending inventory, while eliminating the $450,000 balance in the purchases account. The cost goods sold is the cost assigned to those goods or services that correspond to sales made to customers. In either case, the accountant needs to reduce ending inventory by the amount of those goods that either were shipped to customers or designated as being customer-owned under a bill and hold arrangement.

Is cost of goods sold a debit or credit balance?

Let’s say the business purchases $5,000 worth of products on credit. That means a debit to Inventory and a credit to Accounts Payable in the amount of $5,000. Below is an example of a basic costs of good sold journal entry for an ecommerce business. As with opening inventory, you can conduct a physical count of inventory items, or use a perpetual inventory system for automated updates.

Let’s say you have a beginning balance in your Inventory account of $4,000. When adding a COGS journal entry, debit your COGS Expense account and credit your Purchases and Inventory accounts. Inventory is the difference between your COGS Expense and Purchases accounts. The costs of good sold journal entry for materials and inbound shipping also involves a debit to Inventory and a credit to Cash or Accounts Payable.

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. A lower COGS results in higher gross profit and better profitability. It’s also closely tied to inventory management, where accurate calculations means a better grasp of inventory levels and costs. Your cost of Goods Sold (COGS) is the direct cost you entail for producing or acquiring the goods that you sell. It includes the cost of all the materials, labor, and overhead expenses that are directly related to the creation of these products.

Definition of COGS

Ending inventory is the value of the goods that remain unsold at the end of an accounting period. An item damaged before it’s sold means a debit to an account specific to Loss from Damaged Inventory. Then, you would make a corresponding credit to Inventory to reduce inventory value.

Operational expenses are costs incurred in running the business, but not directly tied to product production or sale. You need to understand COGS if you want to set competitive and profitable pricing. It’s also essential for calculating financial ratios like gross profit margin and inventory turnover. Errors mean you don’t get an accurate view of your business’s financial health or your taxable income. Consider a company that starts the accounting period with a beginning inventory value of $45,000.

An item returned after it’s sold means a debit to Sales Returns and Allowances so it’s not included in your sales revenue. When a business purchases inventory, You make a debit to the inventory account and a credit to the accounts payable or cash account. When you sell inventory, you note a debit to the COGS account and a credit to the inventory account. The nature of the cost of goods sold is an expense and is recorded in the income statement of the company during the period goods are sold.

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An item damaged after it’s sold means a debit to COGS to increase COGS and a credit to Inventory to reduce inventory value. Adjustments to the costs of good sold journal entry for inventory include returns, damaged goods, and unsellable inventory. You need to ensure the accuracy of each costs of good sold journal entry if you want to be profitable. COGS is a major business expense, and errors in this area can really throw your numbers off.