Is the cost of goods sold an expense? — AccountingTools (2024)

FAQs

Is the cost of goods sold an expense? — AccountingTools? ›

The cost of goods sold is usually the largest expense that a business incurs. It includes the costs of all direct materials, direct labor, and overhead associated with the goods or services sold to customers.

Sales revenue minus cost of goods sold is a business's gross profit. The cost of goods sold is considered an expense in accounting. COGS are listed on a financial report.

Difference between COGS and Expense

While it may seem unclear if cost of goods sold is an expense or a cost, it is a cost. COGS is listed under revenue, while expense is listed under its own heading. COGS is listed under revenue because total revenue is sales minus the direct cost to produce the goods.

The cost of goods sold (COGS) is the sum of all direct costs associated with making a product. It appears on an income statement and typically includes money mainly spent on raw materials and labour. It does not include costs associated with marketing, sales or distribution.

OPEX: Total Expenses - COGS

They encompass various expenditures, such as rent, salaries, utilities, insurance, marketing, administrative, and other overhead expenses. Calculating OPEX involves subtracting the cost of goods sold (COGS) from the total expenses listed on the income statement.

The difference between cost of goods sold and OPEX is that COGS directly relates to a specific product a business is selling—or a service a company is delivering. OPEX are costs incurred in day-to-day operations, regardless of whether any product is sold or not.

What Are Expenses in QuickBooks? Expenses are the indirect costs of the business, whereas COGS are the direct expenses related to what you sell.

Yes, you should record the cost of goods sold as an expense. COGS is considered a cost of running the business. To create inventory, you have to spend money. That may include the cost of raw materials, cost of time and labor, and the cost of running equipment.

No, you can't have COGS without sales. Since you can only calculate the cost of goods sold once the goods are actually sold, you will need to make sales in order to have COGS.

It doesn't include administrative, selling, or general expenses. Office rent, accounting and legal fees, advertising expenses, and management salaries are some expenses not included in COGS.

What is COGS classified as in accounting? ›

In accounting, cogs (cost of goods sold) is classified as an expense. It represents the direct costs incurred in producing goods or services that a company sells to generate revenue. COGS includes the cost of materials, labor, and other expenses directly involved in the production process.

COGS is sometimes referred to as cost of merchandise sold or cost of sales. Some companies that sell a mix of products and services prefer a broader term, cost of revenue, of which COGS is one component.

COGS is often the second line item appearing on the income statement, coming right after sales revenue. COGS is deducted from revenue to find gross profit. Cost of goods sold consists of all the costs associated with producing the goods or providing the services offered by the company.

COGS is primarily used by manufacturing and industrial companies that have tangible products. At the same time, cost of sales is more relevant to service-oriented companies and retailers who sell products made by other manufacturers. (As a mnemonic, COGS has "g" for goods in it.)

Your cost of goods sold record shows you how much you spent on the products you sold. To calculate this amount, you multiply the number of products you sold by the cost it took to make or purchase these products. Your journal entry has you debiting the cost of goods sold account and crediting your inventory account.

When adding a COGS journal entry, debit your COGS Expense account and credit your Purchases and Inventory accounts. Inventory is the difference between your COGS Expense and Purchases accounts. Your COGS Expense account is increased by debits and decreased by credits.

For some businesses, COGS may be lumped into a single category like "production costs" or "inventory costs". Other businesses may have more detailed categories like "raw materials", "labor", and "overhead". If your business uses accounting software, there is usually a default COGS account that is set up.

Cost of Goods Sold is important for your taxes. It's the sum total of the money you spent getting your goods into your customer's hands—and that's a deductible business expense. The more eligible items you include in your COGS calculation, the lower your small business tax bill.

What type of account is COGS? In accounting, cogs (cost of goods sold) is classified as an expense. It represents the direct costs incurred in producing goods or services that a company sells to generate revenue. COGS includes the cost of materials, labor, and other expenses directly involved in the production process.