Cost of goods sold (COGS)

The inventory cost removed from the balance sheet and recognised as expense when you sell (or consume) the goods — not the selling price.

Also searched as: cost of sales, cost of merchandise sold, inventory to P&L, gross margin cost

Revenue is what the customer pays. COGS is what those units cost you under your costing method. Gross margin is the difference. Inflating inventory (missed COGS) overstates profit; expensing purchases that still sit on the shelf understates assets.

In a perpetual system, COGS posts with the shipment or invoice. In a periodic system, COGS is often derived: opening + purchases − closing. Both can be valid; mixing them without a stock ledger is how “mystery margin” appears.

Service businesses without inventory still use “cost of sales” for direct delivery cost (freelancers, materials on jobs). The label is shared; the stock mechanics are not.

Periodic COGS bridge

Opening inventory $10,000. Purchases $40,000. Closing inventory counted at $12,000.

  1. Goods available = $10,000 + $40,000 = $50,000.
  2. COGS = $50,000 − $12,000 = $38,000.

P&L COGS is $38,000; balance sheet inventory is $12,000. If closing were wrong by $1,000, profit moves by the same $1,000.

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FAQ

Is freight part of COGS?

Inbound freight that entered inventory becomes COGS when the goods sell. Outbound shipping to customers is usually a selling expense, not inventory COGS.