Starting a Small Business

Accounting Terms: Cost of Goods Sold

by
Delia Mena
on
4/14/2015
Accounting Terms: Cost of Goods Sold

The accounting term "cost of goods sold" refers specifically to the amount of money spent on the creation of a company's product. It is the cost incurred on the labor necessary in the actual fabrication of the product, as well as the funds required for the materials out of which it is made. There may be other costs involved with bringing the product to market, including the cost to distribute the item or the costs required to compensate the sales force, but these are not included in the calculation.

When preparing a company's income statement, the cost of goods sold generally represents the largest expense. When preparing the income statement using the perpetual inventory system, it is a general ledger account. However, when preparing the income statement using the periodic inventory system, there will not be an account under this heading. Instead, there will be a calculation that consists of: the cost of beginning inventory added to the cost of goods purchased (subtracting out any allowances or returns), and then add to that the cost of freight in and subtract the cost of the ending inventory.

Whether you use the perpetual inventory system or the periodic inventory system in the preparation of your income statement, the balance or calculated amount is then matched to the sales amount.

For more information about this term or any other accounting terminology, feel free to contact Tampa Accounting pro Delia Mena.

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Delia Mena

Delia Mena

Delia Mena, CPA is a Tampa based tax professional who specializes in accounting and tax preparation. Delia is the founder of her own tax based practice, Delia's Accounting Service, based in Tampa, FL. With over 12 years of experience, Delia's practice is fully equipped to assist clients with any of their financial needs. Delia's Accounting Service provides the perfect mix of independent paralegal's, bookkeepers, and notary public professionals providing high quality services to a wide range of clients. To learn more about Delia and her practice, visit her website.

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