“Cost of sales” is also known as “cost of goods sold” or COGS which is a represents the direct costs associated with producing the goods in a company sells during a given period. This includes the cost of materials, labor, and manufacturing overhead which is directly associated with the production of goods.
Here’s how you can record the “Cost of Sales” through journal entries:
Basic Cost of Sales Journal Entry
This entry is made at the end of the accounting period when you need to match the cost of goods sold against the revenue from the sale of those goods.
Example 1: Recording Cost of Sales
Scenario: Your business sold goods with a total cost of $50,000 during the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Cost of Sales A/c Debit | 50,000 | |
| 08-31-2024 | To Inventory A/c | 50,000 |
Explanation:
- Cost of Sales will debited to recognize the expense associated with the goods sold during the period.
- Inventory will credited to reduce the inventory balance, reflecting that these goods have been sold.
Example 2: Purchase of Inventory
Before recording the cost of sales, your purchase inventory. Here’s how to record an inventory purchase:
Scenario: Your business purchases $30,000 worth of inventory on credit.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-05-2024 | Inventory A/c Debit | 30,000 | |
| 08-05-2024 | To Accounts Payable A/c | 30,000 |
Explanation:
- Inventory will debited to increase your inventory asset account.
- Accounts Payable will credited to record the liability incurred by purchasing inventory on credit.
Example 3: Adjusting Inventory for Cost of Sales
At the end of the period, you may need to adjust the inventory for any discrepancies, such as inventory shrinkage, spoilage, or damage.
Scenario: After a physical inventory count, you discover that $3,000 worth of inventory is missing.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Cost of Sales A/c Debit | 3,000 | |
| 08-31-2024 | To Inventory A/c | 3,000 |
Explanation:
- Cost of Sales will debited to reflect the expense for the missing inventory.
- Inventory will credited to reduce the inventory balance by the amount of the missing goods.
Example 4: Closing Inventory Adjustment
At the end of the period, you may need to close out the inventory to the cost of sales.
Scenario: At the end of the accounting period, the remaining inventory is $10,000 and you need to close inventory to reflect this in cost of sales.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Cost of Sales A/c Debit | 40,000 | |
| 12-31-2024 | To Inventory A/c | 40,000 |
Explanation:
- Cost of Sales will debited for the cost associated with goods sold during the period.
- Inventory will credited to reflect the decrease in the inventory account as goods are sold.
These entries ensure costs related to the production and sale of goods are accurately reflected in your financial statements, helping to determine gross profit and net income for the period.