For products, the cost of goods sold is simply the price of the product purchased by you for subsequent resale. For example, suppose you are in the pet supplies business. You purchased 1000 packets of pet food at $3.00 each or $3,000 in total. Then you priced them for subsequent resale at, say, $6.00 each. This month, you manage to sell 200 packets of the pet food, generating sales revenue of $6.00 multiplied by 200 or $1,200. Your cost of goods sold for the month is therefore $3.00 multiplied by 200 or $600. Therefore you earned a gross profit of $600. The remaining 800 packets of pet food goes to your inventory at the cost of $2,400. Your accounts for this transaction is therefore like the one below.
|Profit and Loss A/C||Balance Sheet|
|Cost of Goods Sold||-$600.00||Deduction||-$600.00|
|Gross Profit||$600.00||Balance Stocks||$2,400.00|
For services, the cost of goods sold is the purchase price of products used by you in the delivery of the service. However, unlike products, there is often a less direct relationship between the amount charged for the service and the use of products in the delivery of the service. Although this does not matter, it nevertheless makes estimating the cost of goods sold for services a bit more difficult in some cases. Note that there may be service businesses in which the cost of goods sold may be zero or negligible. This may be so if you are in the business of developing Android or Iphone apps.
Cost of Goods Sold