The Cost of Goods Sold Journal Entry is Debit the Cost of Goods Sold Account and Credit the Inventory/Purchase Account. Cost of Goods Sold (COGS) represents the direct costs associated with the production or purchase of goods that a company sells during a specific period. It includes the cost of raw materials, labor, and overhead directly tied to production. When recording COGS in the journal, it’s typically done at the end of an accounting period when goods are sold.
Here are some examples of journal entries related to the Cost of Goods Sold:
Example 1: Recording Cost of Goods Sold at the Time of Sale
On March 31, 2024, your business sells inventory worth $10,000. The cost of this inventory (COGS) is $6,000.
Journal Entry for COGS:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-31-2024 | Cost of Goods Sold | 6,000 | |
| 03-31-2024 | To Inventory | 6,000 |
Explanation:
- Cost of Goods Sold will debited to record the expense associated with the goods sold.
- Inventory will credited to reduce the asset as the goods have been sold.
Journal Entry for Sales Revenue:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-31-2024 | Accounts Receivable | 10,000 | |
| 03-31-2024 | To Sales Revenue | 10,000 |
Explanation:
- Accounts Receivable will debited to recognize the amount due from the customer.
- Sales Revenue will credited to recognize the income from the sale.
Example 2: Adjusting Entry for COGS at Year-End
At the end of the fiscal year, December 31, 2024, your business calculates that the beginning inventory was $20,000, additional purchases during the year were $50,000, and the ending inventory is $15,000.
Calculation:
- Beginning Inventory: $20,000
- Purchases: $50,000
- Ending Inventory: $15,000
- Cost of Goods Sold: $55,000
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Cost of Goods Sold | 55,000 | |
| 12-31-2024 | To Inventory | 55,000 |
Explanation:
- Cost of Goods Sold will debited to reflect the total cost of goods sold during the year.
- Inventory will credited to adjust the inventory balance to the correct amount after accounting for sales.
Example 3: Recording COGS When Goods Are Returned
On April 15, 2024, a customer returns goods worth $2,000, for which the cost of goods sold was $1,200.
Journal Entry to Reverse COGS:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-15-2024 | Inventory | 1,200 | |
| 04-15-2024 | To Cost of Goods Sold | 1,200 |
Explanation:
- Inventory will debited to add the returned goods back into inventory.
- Cost of Goods Sold will credited to reverse the cost associated with the returned goods.
Journal Entry for Sales Return:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-15-2024 | Sales Returns & Allowances | 2,000 | |
| 04-15-2024 | To Accounts Receivable | 2,000 |
Explanation:
- Sales Returns & Allowances will debited to reduce sales revenue due to the return.
- Accounts Receivable will credited to reduce the amount due from the customer.
Example 4: Periodic Inventory System Adjustment for COGS
Using a periodic inventory system, your business determines the inventory at the end of the period is $30,000, with a beginning inventory of $40,000 and $70,000 in purchases.
Calculation:
- Beginning Inventory: $40,000
- Purchases: $70,000
- Ending Inventory: $30,000
- Cost of Goods Sold: $80,000
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Cost of Goods Sold | 80,000 | |
| 12-31-2024 | To Inventory | 80,000 |
Explanation:
- Cost of Goods Sold will debited to account for the total cost of goods sold during the period.
- Inventory will credited to adjust the inventory balance based on the physical count.
These examples cover different scenarios involving the Cost of Goods Sold, helping you understand how to record this critical accounting entry in various situations.