A cost of goods journal entry is made to reflect the costs associated with inventory sold to customers during the accounting period. This entry adjusts the inventory account and recognizes the expense in the income statement.
General COGS Journal Entry Format
When goods are sold, two main journal entries are made:
- Record the Sale (Revenue):
- You record the sales revenue received from the customer.
- Record the Cost of Goods Sold:
- You move the cost of the inventory from the balance sheet (Inventory account) to the income statement (COGS account).
Example: Recording COGS
Let’s assume you sold goods worth $5,000 for a sales price of $10,000.
1. Record the Sale of Goods (Revenue)
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Accounts Receivable A/c Debit | 10,000 | |
| 09/06/2024 | To Sales Revenue A/c | 10,000 |
Explanation: This entry records the revenue from the sale of goods. Accounts Receivable will be debited (assuming the sale was on credit), and sales revenue will be credited.
2. Record the Cost of Goods Sold (COGS)
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Cost of Goods Sold (COGS) A/c Debit | 5,000 | |
| 09/06/2024 | To Inventory A/c | 5,000 |
Explanation: This entry reflects the cost of the inventory that has been sold. The COGS account will be debited, recognizing the expense in the income statement, and Inventory account will credited, reducing the asset on the balance sheet.
Additional Examples of COGS Journal Entries
Example 2: Sale of Goods on Credit
- Goods sold: $2,000 (Cost)
- Sale price: $4,000 (on credit)
1. Record Sales Revenue:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Accounts Receivable A/c Debit | 4,000 | |
| 09/06/2024 | To Sales Revenue A/c | 4,000 |
2. Record Cost of Goods Sold:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Cost of Goods Sold (COGS) A/c Debit | 2,000 | |
| 09/06/2024 | To Inventory A/c | 2,000 |
Example 3: Sale of Goods for Cash
- Goods sold: $3,000 (Cost)
- Sale price: $7,000 (cash)
1. Record Cash Sales:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Cash A/c Debit | 7,000 | |
| 09/06/2024 | To Sales Revenue A/c | 7,000 |
2. Record Cost of Goods Sold:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Cost of Goods Sold (COGS) A/c Debit | 3,000 | |
| 09/06/2024 | To Inventory A/c | 3,000 |
Understanding COGS
- COGS represents the direct cost of producing or purchasing goods sold during the period. It includes materials, labor,, and manufacturing overhead (if applicable).
- Inventory is reduced when goods are sold, and the corresponding cost is transferred to the Cost of Goods Sold account as an expense, affecting the company’s gross profit.