Is Cost Of Goods Sold An Expense Or Revenue?

What Is Cost of Sales?

You May be eager to know the answer of this question, that "What Type of Account is Cost of Goods Sold (COGS)"? The answer is that it is a Direct Expense as it is incurred in bringing the goods in their saleable position. According to Matching Principle GAAP, “All the Expenses incurred in bringing the goods in their salesable position are parts of the costs of Revenue and must be set off with that revenue”. So, it is not a revenue but, in fact, incurred to earn revenue for the business during business operations.

                                                 You may also be interested in “What is Expense”

How To Calculate Cost of Goods Sold

Cost of Sales or Cost of Goods Sold is calculated from the following formula in case of Finished Goods:

                                           (For Trading Or Merchandising Companies)

Cost of Sales = Opening Inventory + Net Purchases - Closing Inventory

Here Opening Inventory is the goods remained unsold in the previous accounting period. Purchases are further purchasing of goods during the Current Accounting Period and Closing Inventory is the goods remain unsold during the Current Accounting Period.

Note:

For Manufacturing Company, the Cost of Goods Sold is prepared by preparing Cost of Goods Statement in which, firstly, it calculates Cost of Goods Manufactured and then this cost of goods manufactured is adjusted with finished goods in order to calculate the Cost of Goods Sold or Cost of Sales for the Current Accounting Period.

                                         (For Manufacturing or Producing Companies)

Cost of Goods Sold = Cost of Goods Manufactured + Opening Finished Goods - Ending Finished Goods

For Example, if the company manufactures Furniture for the purpose of selling, then all the costs associated with the production the furniture are added up to the cost of the Furniture, like purchase of raw material, Direct Labour Costs, and Factory Overhead (FOH), like Electricity Costs, Transportation Costs, etc are added to the Cost of Producing the Furniture.

How To Calculate Cost of Goods Sold From Income Statement

As Cost of Sales is shown in the Trading & Profit And Loss Account or Income Statement Under Direct Expense and used to calculate Gross Profit or Gross Loss, So, Cost of Sales is also calculated from the following Formula:

Sales - Cost of Sales = Gross Profit

Example: If Sales of the Business is Rs 600000 Per Month and Gross Profit is Rs. 500000, then Cost is Sales is calculated by using the following given  formula:

Cost of Sales = Sales - Gross Profit

Cost of Sales = 600000 - 500000 = 1000000

So, Cost of Sales Or Cost of Goods Sold is a direct Expense in Accounting.