Recording a Cost of Goods Sold Journal Entry

How to Record a Cost of Goods Sold Journal Entry

As a small 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? Learn more about COGS accounting, including the steps on how to record COGS journal entries, below.

What is COGS accounting?

If you are familiar with COGS accounting, you will know that your COGS is how much it costs to produce your goods or services. COGS is beginning inventory plus purchases during the period, minus your ending inventory. You will only record COGS at the end of accounting period to show inventory sold. It’s important to know how to record COGS in your books to accurately calculate profits.

Calculating COGS

Now that you know more about COGS accounting, 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 COGS

Let’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.

How to record COGS as journal entries

Follow the steps below to record COGS as a journal entry:

how to record cost of goods sold journal entry

1. Gather information

Gather information from your books before recording your COGS journal entries. Collect information such as your beginning inventory balance, purchased inventory costs, overhead costs (e.g., delivery fees), and ending inventory count.

2. Calculate COGS

Calculate your COGS using the formula:

COGS = Beginning inventory + purchases during the period – ending inventory

3. Create a journal entry

Once you prepare this information, you can 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, you will debit your COGS Expense account and credit your Purchases and Inventory accounts.

Purchases are decreased by credits and inventory is increased by credits.

You will credit your Purchases account to record the amount spent on the materials. Inventory is the difference between your COGS Expense and Purchases accounts.

PurchasesMaterials purchasedX

COGS journal entry example

Let’s say you have a beginning balance in your inventory asset account of $4,000. You purchase $1,000 of material during the accounting period. At the end of the period, you count $1,500 of ending inventory.

Your COGS expense is a $3,500 debit ($4,000 + $1,000 – $1,500). The inventory account is a credit of $2,500 ($3,500 COGS – $1,000 purchase).

The COGS entry would look like:

XX/XX/XXXXCOGS Expense3500
PurchasesMaterials purchased1000

Why is COGS important?

COGS is included on your income statement. Your income statement reports your business’s profit and losses. It shows your business’s sales, expenses, and net income.

Subtract COGS from your business’s revenue to get gross profit. Gross profit can show 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.

COGS is also known as the cost of doing business. For higher net profits, businesses want to keep their COGS as low as possible.

Are you computing your cost of goods sold and need a way to record your journal entries? Patriot’s online accounting software makes it easy to record business expenses. We also offer free, U.S.-based support. Start your free trial today!

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