How to calculate cost of goods sold in Tally

Journal Entry for Cost of Goods Sold (COGS)The followingCost of Goods Sold journal entries provides an outline of the most common COGSCOGSThe Cost of Goods Sold (COGS) is the cumul

How to calculate cost of goods sold in Tally

Journal Entry for Cost of Goods Sold (COGS)

The followingCost of Goods Sold journal entries provides an outline of the most common COGSCOGSThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more. Inventory is goods that are ready for sale and is shown as Assets in the Balance Sheet. When that inventory is sold, it becomes an Expense, and we call that expense as Cost of goods sold. Inventory is the cost of goods which we have purchased for resale, once this inventory is sold it becomes the cost of goods sold and the Cost of goods sold is an Expense.Sales Revenue  Cost of goods sold = Gross Profit.

Gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more can also be called Gross Margin.

  • Sales revenue is based on the Sales Price of Inventory sold.
  • Cost of goods sold based on the Cost of inventory sold.
  • Inventory is based on the Cost of inventory in hand.

Journal Entries for Cost of Goods Sold Example

Suppose we have purchased 100 pens of $25/- each,So the Journal entry for the above transaction will be:

Cost of goods sold example 1

Now, these pens are purchased known as inventory because this is purchased with the intention to resale it.

Thus it means, it is Inventory.

Cost of goods sold example 1-1

Now suppose we have sold this inventory

Then two transactions take place

  • First Sale of goods (pens);
  • Second, losing inventory (pens).

Suppose we sold 60 pens at $30/- each.

Cost of goods sold example 1-2

Now we dont have 60 pens in our inventory anymore.

60 pens at cost= 60*25 that is $1500.

This is the Cost of goods sold.

Now, we need to adjust the inventory by the cost of goods sold.

Cost of goods sold example 1-3

The sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account.read more and cost of goods sold will be shown in the Income Statement.

Gross Profit = Sales revenue  Cost of goods sold300 =1800-1500

Or

Sales  Gross profit = Cost of goods sold1800-300 = 1500.

So the cost of goods sold is an expense charged against Sales to work out Gross profit.

  • Cost of goods sold formula does not include general expense such as salary,

Wages, advertising, etc. since it is a direct costDirect CostDirect cost refers to the cost of operating core business activityproduction costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more of the inventory that we have sold during the year;

COGS Journal Entries Example (with opening and closing inventory)

XYZ Limited has an opening inventory of $25000/-.The company has purchased goods of $55000/- from the supplier during the month, and at the end of the month, the ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more of $15000/-.

The cost of goods sold journal entry will be:

example 1-4

The formula for Cost of Goods Sold (COGS):Cost of Goods Sold (COGS) = Opening Inventory + Purchases  Closing Inventory

OrCost of Goods Sold (COGS) = Opening Inventory + Purchase  Purchase return -Trade discount + Freight inwards  Closing Inventory.

example

Points to Remember

  1. The cost of goods sold in a manufacturing business includes direct material, labor cost, product cost, allowances, freight inwards, and factory production overheadFactory Production OverheadFactory Overhead, also called Factory Burden, is the total of all the indirect expenses related to the production of goods such as Quality Assurance Salaries, Factory Rent, & Factory Building Insurance etc. read more.
  2. In Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more, only a purchase account is shown with years of the total purchase value, not the cost of goods sold.
  3. The Cost of Goods Sold Journal Entry is made for reflecting closing stockClosing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more. That is an increase or decrease in stock value.
  4. The Cost of Goods Sold is deducted from revenues to calculate Gross Profit and Gross Margin.

This article has been a guide to the Cost of Goods Sold (COGS) Journal Entry. Here we discuss the examples of Journal entries for the cost of goods sold with detailed explanation. Here are the other articles in accounting that you may like

  • Gross Profit Formula
  • COGS Examples
  • LIFO Inventory
  • Finished Goods Inventory

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