Cost of Goods Sold refers to the carrying value of goods sold during a particular period. This is used to determine stock turnover ratio. It is mostly related to direct cost and sales. What is Cost of Goods – Sold ? Cost of goods sold means cost which is attributable to the sales made. It is the cost assigned to those goods or services that correspond to sales made to customers. Gross profit can be calculated by deducting cost of goods sold from sales. it answer to How to Calculate Beginning Inventory also. Gross Profit = Sales – Cost of goods sold How to calculate cost of goods – sold Equation for Cost of Goods – Sold– Cost of goods sold = Opening Stock + Purchases – Closing Stock The first important component is raw materials cost (freight or carrying and storage cost also) Direct labor cost, Direct expenses, Production overhead expenses, Depreciation which non cash expenses but operating expenses relating to production, Cost of closing inventory or finished goods The cost which is attributable to goods produced by the company for sales is called as cost of goods sold or cost of sales. The following are the costs not included in Cost of Goods Sold such as – Selling overhead expenses, Distribution costs, Loan Interest paid, General Insurance cost, Tax paid, Other office expenses and Cost in the nature of abnormally incurred which not attributable to production, Accounting Entry In cost books the cost of goods sold expenses is accounting by using the following entry. Cost of goods sold A/c Debit To purchase A/c Credit To inventory A/c Credit Example Goodwill Inc. is has the following information during the period. The opening balance of stock account is $200,000. During the year the company purchase goods worth is $10,0,000 of raw materials goods from the suppliers. The closing inventory at the year ended is $400,000 which is stock on hand. To pass, cost of goods sold, journal entry. Normally the entry should be separately passed but for accounting convenience compound also is easier. The entry could as follows – Cost of goods sold A/c Debit 12, 00,000 Purchases A/c Credit 10, 0,000 Inventory or stock A/c Credit 200,000 The closing or finished goods should be matched with closing stock accounted in balance sheet. Click here Importance of Cost of Good Sold It is the prime cost for calculating gross profit. It determines the contribution margin. Cost of sales is used to calculate inventory turnover ratio instead of sales . It is the cost which is only basic operating expenses and measures the actual or substantial portion is profit in period. It is useful for decision making relating to manufacturing is taken based on the cost of sales. Because it is variable operating production cost. In marginal costing technique, decision is taken with reference to cost of sales. Cost of Goods – Sold identifies the cost movement then manufacture can determine the optimal point cost. Originally posted 2015-02-15 12:14:00.
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