Every merchandising business has goods on hand that it holds for sale to customers. The amount of goods on hand at any one time is known as merchandise inventory. The Total Cost of Goods Available for Sale during the year is the sum of two factors: Beginning Inventory and Net Purchases.
To get the amount of net purchases, add purchases account, a temporary or nominal account used only for merchandise purchased for sale. Its sole purpose is to accumulate the total cost of merchandise purchased during an accounting period. The freight-in, a transportation charge that is considered addition to the cost of purchased merchandise is added. To get the total goods available for sale, purchase returns, allowances and purchase discounts are deducted. These are contra-purchase accounts with a normal credit balance and are accordingly deducted from purchases in the income statement.
Net Purchases Formula
Cost of Goods Sold
Cost of Goods Sold (COGS) is the cost of products sold by the seller to customers. So, if an entity were to sell all the goods available for sale during a given period or year, the cost of goods sold would then equal to goods that had been available for sale. However, most of the time, entities still have goods unsold and on hand at year end. To find out how much the seller paid for the goods that were actually sold, the unsold merchandise inventory at the end of the year must be subtracted from the goods available for sale. Here’s the Cost of Goods Sold Formula for a merchandising business:
Cost of Goods Sold Formula
Cost of Goods Sold Formula Sample Problem
Justine started with Php 62,800 in merchandise inventory at the beginning and purchased a net of Php 135,860 in goods during the year. At the end of the year, Php 58,300 in goods was left unsold. How much is the Cost of Goods Sold?
When this unsold merchandise inventory is subtracted from the total goods available for sale, an amount of Php 140,360 is the result of cost of goods sold. Here’s the solution using the Cost of Goods Sold Formula: