Let’s take as an example bakery business.

More simplified formula can look like this: Only cost of inventory sold will go to the Income Statement and will be included into the Cost of Good Sold.

In the above formula costs in monetary means are being used. Inventory Available for Sale – Ending Inventory = Inventory Sold In order to understand how to calculate cost of goods sold, we will use the following Cost of Goods Sold formula:īeginning Inventory + Purchased/Manufactured Inventory = Inventory Available For Sale inventory being purchased/manufactured, stored, sold and process runs again and again. Usually we analyse and account for transactions on already operating business, therefore the manufacturing and/or trading flow is continuous, i.e. All the inventory, which was not yet sold during the accounting period is accounted for in the Balance Sheet until is being sold. Cost of Goods Sold – Financial Statementsįrom the picture below you can note that only costs of that inventory, which was sold during the particular period of time can be included into the Income Statement.

overhead directly involved in creating the productįor the manufacturing or trading business it is important to understand that we must apply matching principle and match revenues earned with the costs incurred to earn such revenue.

Cost of Goods Sold (COGS) – D irect costs, tied to the production of the goods a business sells.

Therefore there will be no Inventory (manufactured or purchased) and there will be no Cost of Goods Sold. It cannot be applied to the businesses, which provide services, since such businesses do not produce or sell goods. It is essential to understand that the below explanation and Cost of Goods Sold represents concept applicable only to manufacturing or to trading business.

Cogs accounting equation