The expense of purchasing and preparing the merchandise sold during a period
|
For retailers, wholesalers and distributors, efficient inventory management is one of the keys to business success. These companies often have considerable amounts of money invested in stock that’s intended for sale to customers. For many companies, this inventory of goods for sale — known as merchandise inventory — is their most valuable asset; automobile dealers, for example, may have millions of dollars tied up in vehicle inventory. A company’s ability to manage its merchandise inventory can affect its profitability, competitiveness, customer satisfaction and, ultimately, its survival. Show
What Is Merchandise Inventory?Merchandise inventory is so called because retailers, wholesalers and distributors make money by buying goods from manufacturers or other suppliers and then merchandizing — that is, marketing and selling — those products to customers. Merchandise inventory is the manifestation of the value of the goods a retailer or other reseller intends to sell to customers. It includes the goods the company holds in all locations — including storage facilities, warehouses and retail stores. Key Takeaways
Merchandise Inventory ExplainedMerchandise inventory includes the amount the retailer or other reseller paid for the items themselves, as well as additional costs incurred by the company such as shipping, insurance and storage. Merchandise inventory includes all unsold stock that is ready for sale, whether it’s located in stores or warehouses. Cost of goods sold (COGS) is the total of the costs directly attributable to producing things that can be sold. COGS includes direct costs, such as material and labor, but does not include indirect costs, such as sales, marketing or distribution. In accounting, COGS is a standard item in the expense section of a company's profit and loss statement (P&L). Costs can only be expensed and shown in the P&L after the goods have been sold and their revenues reported in the P&L. The cost of creating goods or services that are not sold should not be included. COGS = Beginning Inventory + Purchases during the Period – Ending Inventory Once the cost of goods sold has been found, the answer can be used to calculate a business’s gross income. This is the amount a business earns from sales before deducting taxes and other expenses. Gross Income = Revenue – COGS The gross profit can then be used to calculate the net income, which is the amount a business earns after subtracting all expenses. Net Income = Revenue – COGS – Expenses COGS is sometimes referred to as cost of merchandise sold or cost of sales. Some companies that sell a mix of products and services prefer a broader term, cost of revenue, of which COGS is one component. 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!). What is COGS accounting?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. Simply put, COGS accounting is recording journal entries for cost of goods sold in your books. When is cost of goods sold recorded? 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. That’s where COGS accounting comes into play. If you don’t account for your cost of goods sold, your books and financial statements will be inaccurate. Calculating COGSBefore you can jump into learning about recording cost of goods sold journal entry, you need to know how to calculate COGS. Follow the formula below to calculate your COGS: COGS = Beginning inventory + purchases during the period – ending inventory Example of calculating COGSLet’s say your business’s beginning inventory is $2,000 and you purchase $500 of supplies during the period. Your ending inventory is $200. Your COGS calculation would look like this: COGS = $2,000 + $500 – $200 Your COGS would be $2,300.  Need help setting up your business’s books so you can track COGS, expenses, income, and more? Check out our FREE guide, How to Set up Your Accounting Books for the First Time, for steps and tips. Get My Free Guide! Why is COGS important?Your income statement includes your business’s cost of goods sold. This financial statement reports your profit and losses. It also shows your business’s sales, expenses, and net income. Along with being on oh-so important financial documents, you can subtract COGS from your business’s revenue to get your gross profit. Gross profit shows you how much you are spending on COGS. Knowing your business’s COGS helps you determine your company’s bottom line and calculate net profit. How to record cost of goods sold journal entryFollow the steps below to record COGS as a journal entry: 1. Gather informationGather information from your books before recording your COGS journal entries. Collect information ahead of time, such as your beginning inventory balance, purchased inventory costs, overhead costs (e.g., delivery fees), and ending inventory count. 2. Calculate COGSCalculate COGS using the formula: COGS = Beginning inventory + purchases during the period – ending inventory 3. Create a journal entryOnce you prepare your information, generate your COGS journal entry. Be sure to adjust the inventory account balance to match the ending inventory total. You may be wondering, Is cost of goods sold a debit or credit? 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. Your COGS Expense account is increased by debits and decreased by credits. 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. Here’s what your journal entry for COGS for materials purchased should look like: DateAccountNotesDebitCreditXX/XX/XXXXCOGS ExpenseMaterials purchasedXPurchasesXInventoryXCOGS journal entry examplesCheck out a couple of examples of recording COGS journal entries in your books. Example 1Let’s say you have a beginning balance in your Inventory account of $4,000. You purchase $1,000 of materials during the accounting period. At the end of the period, you count $1,500 of ending inventory. Debit your COGS expense $3,500 ($4,000 + $1,000 – $1,500). Credit your Inventory account for $2,500 ($3,500 COGS – $1,000 purchase). The COGS entry would look like this: DateAccountNotesDebitCreditXX/XX/XXXXCOGS ExpenseMaterials purchased3,500Purchases1,000Inventory2,500Example 2Say your company makes computers and it costs you $200 to make each one. During the period, you sold 100 computers. Your COGS is $20,000 ($200 X 100). Here’s what it would look like as a journal entry: DateAccountDebitCreditXX/XX/XXXXCOGS 20,000Inventory20,000Debit your COGS account and credit your Inventory account to show your cost of goods sold for the period. Is the term used for the expense of buying and preparing merchandise for sale?Cost of goods sold includes the expenses of buying and preparing an item for sale. Cost of goods sold is used to figure gross profit. Cost of goods sold is an expense reported on the income statement.
What kind of expense is cost of merchandise sold?Cost of goods sold refers to expenses directly related to the production of a product, such as the materials needed to assemble a product and the transportation needed to bring goods from a distributor to a retailer. Both types of expenses are recorded as separate line items on a company's income statement.
Is purchasing merchandise an expense?In the context of companies that sell merchandise, the term purchases refers to the purchases of goods that are intended to be sold to customers. The cost of the goods that are sold are expensed on the income statement.
What is cost of merchandise sold in accounting?The cost of merchandise sold is the cost of goods that have been sold by a wholesaler or retailer. These entities do not manufacture their own goods, instead buying the goods from third parties and selling them to their customers.
|
