Unit 12 - Purchases vs Cost of Goods Sold

A business either sells a good or a service. Cost of goods sold refers to the cost of manufacturing a product, including direct and indirect costs. In some companies, it is referred to as inventory rather than purchases. Inventory is the merchandise that is purchased for resale to customers. It is considered a current asset and is recorded in the income statement and balance sheet.

Example:

YZ Bookshop purchases 100 of Stephen King’s bestselling novels to be sold to its customers. The price per book is $15 and the total shipping cost is $500.

From the example above:

Cost of Goods Sold (COGS) = ($15 x 100) + $500

= $1500 + $500 = $2000

When the books are sold, $2000 is removed from inventory and recorded as Cost of Goods Sold in the income statement.

EXAMPLE:

You are the owner of a clothing store with the following transaction.

You sold 4 dresses at $500 each. The cost prices of the dresses were $250 each.

Therefore, $1,000 ($250 x4) will be debited from the Inventory Ledger and credited to Cost of Sales Ledger .

Sales Ledger will be credited $2000 (4 x $500)