Cost of Goods Sold (COGS)
Cost of goods sold is the inventory cost recognized as an expense for the products sold during a period.
What is Cost of Goods Sold?
COGS connects merchandise leaving inventory with the sales it generated. For a reseller, the starting point is the acquisition cost of the goods; for a manufacturer, the cost base also involves production. The relevant cost is attached to units sold, not every unit purchased.
Inventory cost can include purchase price and costs of bringing goods to their present location and condition, such as attributable inbound transport. It is therefore not always identical to the supplier’s unit price. Outbound customer delivery and advertising generally sit outside a reseller’s inventory-cost boundary.
COGS = Opening inventory + Net inventory purchases − Closing inventory
This simplified merchandise equation uses cost values throughout and assumes no separate write-downs, shrinkage or other inventory adjustments. Production businesses need the corresponding production-cost records.
Purchases and sales costs are different
A store starts the month with $8,000 of inventory, adds $12,000 of net inventory purchases and ends with $7,000. With no other adjustments, COGS is $8,000 + $12,000 − $7,000 = $13,000. The $7,000 remaining stock has not become the cost of this month’s sales.
How to interpret it
COGS determines the product-cost deduction used to calculate gross profit. If product costs are missing or stale, reported gross margin can look stronger than the sales actually support. A zero cost field is a data question before it is evidence of a free product.
Cost timing matters when supplier prices change. The cost attached to sold units follows the business’s inventory valuation method; substituting today’s replacement price may answer a planning question but does not necessarily reproduce accounting COGS.
Returns require linked treatment. A sales refund reduces the relevant revenue, while a resalable item returned to inventory may reverse its associated product cost. A damaged return, write-down and handling fee are separate events; combining them into a single refund deduction can obscure the records.
The simple opening-plus-purchases-minus-closing equation is a reference, not a substitute for reconciled stock records. Inventory losses and valuation adjustments need an explicit treatment so they are neither omitted nor counted twice.
What a product cost record represents
A unit cost is an input to COGS, not the entire period calculation. If 300 units costing $10 each are acquired but only 180 are sold, the basic product cost attached to those sales is $1,800. The other $1,200 stays with the remaining units before any valuation adjustments. This distinction is why a stock purchase report and a sales margin report need different totals. It also explains why tracking only supplier invoices cannot fully establish the cost of a period’s sales.
Common mistakes
Expensing every stock purchase immediately
Buying inventory uses cash, but unsold goods generally remain an asset until sold or otherwise expensed under the applicable accounting treatment.
Mixing cost and retail values
Closing inventory at selling prices cannot be subtracted from opening inventory measured at cost. Keep both sides on the same valuation basis.
Definition reference: IAS 2 inventory cost principles.