Cost of Goods Sold Journal Entry

Cost of Goods Sold or Cost of Sales is a direct cost associated with the cost of production it doesn’t include indirect cost which is not related to cost of production.

As there two inventory accounting systems of recording inventory that are Periodic Inventory System And Perpetual Inventory System, so cost of goods sold journal entry is also recorded accordingly. We can record Cost of Sales Journal Entries with the help of an example. Let say, that we have opening inventory of Rs. 50000. Inventory Purchases (6 Pieces of Sofas at the rate of Rs. 70000 each) during the accounting period is Rs. 420000. 2 Units of Sofas remain unsold during the accounting cycle worth Rs. 140000. Pass Journal Entries to record Cost of Sales of Sofas.

(i) To Record Cost of Sales

                                    Cost of Sales a/c  470000

                                                               Inventory Purchases a/c  420000

                                                               Opening Inventory a/c     50000

                            (Inventory Purchases And Opening Inventory Closed To Cost of Sales)

As not all pieces of sofas are sold, so there is a need to adjust the sales price of sofas with the cost price of goods remain unsold according to the Matching Principle Concept Gaap, so we pass the following cost of sales journal entry:

                                 Closing Inventory a/c  14000

                                                                    Cost of Sales a/c  140000

                                        (Cost of Sales is Adjusted With the Sales Price of Sofas)

(ii) To Record Cost Of Sales Under Perpetual Inventory System 

Only one entry is passed to update the value of inventory recorded on daily basis, so we pass the following cost of sales entry for 4 sofas sold:

                                            Cost of Sales a/c  240000

                                                                         Inventory a/c  240000

                                                 (Cost of Sales For 4 Sofas Is Recorded)

Here Cost Price of 4 Sofas = 4 X 70000 = Rs. 280000

Cost of Goods Sold Closing Entry

Before the closing of the accounting period, we need to record Closing Entries in order to close all Temporary Accounts. As Cost of goods sold is a temporary account as it is a direct expense and also it is recorded in Income Statement or Trading & Profit And Loss Account. So it is also needed to be closed. Cost of Goods Sold or Cost of Sales is closed to Income Summary Account. The following Closing Journal Entry is passed as shown below:

                                  Income Summary a/c   XXX

                                                                  Cost of Good Sold a/c   XXX

                           (To Close Cost of Goods Sold To Income Summary Account)

So, Cost of Sales Under both methods follows Matching Principle and these are the two different methods of presenting the inventory on Financial Statements.