Is cost of goods sold a debit or credit? The COGS account is an expense account on the income statement, and it is increased by debits and decreased by credits. Purchases and inventory, since they are asset accounts, are also increased by debits and decreased by credits. When making a journal entry, COGS should be debited and purchases and inventory accounts should be credited, showing the assets have been sold and their costs moved to COGS (one account is debited, and one or more other accounts are credited to balance the entry). The credits to purchases and inventory should equal the debit to COGS. The journal entry for COGS should equal purchases plus inventory.
| Account | Debit | Credit |
|---|---|---|
| COGS | 15000 | |
| Purchase | 15000 |
Cost of Goods Sold T-Account
T-accounts provide visual representations of debits and credits. In a double entry accounting system, which means each transaction is recorded in at least two accounts; one debit and one credit. These are journal entries, with debits and credits either increasing or decreasing a given account. Regardless of the account, the debit is always on the left-hand side of the t-chart, and the credit is always on the right-hand side of the t-chart.
Cash, accounts receivable, and inventory are considered asset accounts, and debits always increase these accounts. For liabilities, the opposite is true. On the income statement, revenues are shown to decrease with debits and increase with credits. Expenses, for example, are increased with debits and decreased with credits.
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The first step for how to record a cost of goods sold journal entry_is to gather the information needed to calculate COGS. This information will be found in various general ledger accounts. The beginning inventory balance will be the total of the inventory asset accounts in the general ledger. Purchased inventory costs may be included in the inventory assets accounts, or they may be in a separate purchases account. Ending inventory will require a physical count unless a perpetual inventory system is used. Calculating the cost of ending inventory can become complicated, as it is dependent on the costing system used.
Once the information is assembled, COGS can be calculated by adding the beginning inventory total, plus purchases, and then subtracting the cost of ending inventory. When making a journal entry, debits increase COGS, and credits decrease COGS. As inventory is sold, the sales decrease inventory and increase COGS. As more inventory is purchased to produce more items for sale, the inventory and purchases accounts increase, thereby decreasing the cash account, so journal entries are also required for purchases, inventory, cash, and sales accounts as inventory is purchased and products are sold. The COGS calculation is used to determine gross profit on the balance sheet:
Sales or Revenue - COGS = Gross Profit
Cost of Goods Sold Journal Entry Example
In double entry accounting, each transaction that occurs results in two entries; one of which is a credit, and the other a debit.
When inventory or materials are purchased, the appropriate assets account (inventory, materials, purchases) is debited to show an increase. The corresponding credit is to accounts payable, a liability account.
| Account Name | Debit | Credit |
|---|---|---|
| Purchase | 20000 | |
| Accounts Payable | 20000 |
When products are sold, the asset account of accounts receivable is debited to show an increase, and Sales, a revenue account, is credited in the same amount to show an increase.
| Account Name | Debit | Credit |
|---|---|---|
| Accounts Receivable | 25000 | |
| Sales | 25000 |
To account for the cost of producing the items sold, ending inventory and COGS are both debited, and at the same time purchases and ending inventory are credited.
These steps provide a snapshot of inventory and associated costs at the end of an accounting period, and the figures for sales and COGS are used to calculate gross profit, which is reported on the balance sheet.
| Account Name | Debit | Credit |
|---|---|---|
| Ending Inventory | 6000 | |
| Cost of Goods Sold | 8000 | |
| Purchases | 12000 | |
| Beginning Inventory | 2000 |
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Job order cost flow, or job costing, is used when products or services (jobs) are unique and costs can be attributed to an individual job. A separate cost record is maintained for each job to record direct materials, direct labor, and manufacturing overhead. The job cost record also documents costs of the work-in-process inventory, the finished goods inventory, and the cost of goods sold, serving as a subsidiary ledger.
Examples of job order costing:
- A baker designs and produces custom cakes
- A metal fabricator designs and produces custom handrails
- A company produces custom-made pole barns and other out-buildings
- An attorney creates an estate plan
Job Order Cost Flow Example
In a job order cost system, direct materials, direct labor, and manufacturing overhead are attributed to individual jobs. During the manufacturing process, the work-in-process inventory account is used to document direct materials and direct labor. As direct materials are requested, the materials are released from the raw materials inventory and attached to the job. Direct labor is recorded by employees who are assigned to the job. When the job is completed, overhead is allocated to the job at a predetermined rate.
A job cost sheet is used throughout production to record the costs of the job (direct materials, direct labor, and overhead). The total amount is transferred to the finished goods account, then when the product is sold, the sale is recorded in sales and the cost is transferred from the finished goods account to the COGS account. Job order costing provides a more detailed accounting of costs associated with custom jobs, but raw materials, work-in-process, and finished goods are all inventory accounts, and the debits and credits used, while more detailed, do not substantially change. All inventory and expense accounts specific to the job are credited and COGS is debited to record the job cost.
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Cost of goods sold (COGS) documents the inventory and purchase amounts spent on products or services produced, manufactured, or sold during a given time period. COGS can be calculated per item by multiplying the cost per unit by the number of units sold. To record a cost of goods sold journal entry, COGS is debited and the inventory account is credited. Job order cost flow is a method used when custom orders are produced, for example, houses or wedding cakes. When the job order cost method is used, direct costs of inventory, materials, labor, and factory overhead are tracked and COGS is recorded for individual products. This provides a greater level of detail when calculating COGS. In double entry accounting, two entries are required for each transaction. Depending on the type of account, debits may increase or decrease the account. Likewise, credits may increase or decrease an account. T-accounts are useful in tracking debits and credits across asset, liability, and equity accounts.
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Video Transcript
What Is Cost of Goods Sold?
Owning a business requires a lot of paperwork. You need paperwork to order your supplies. You need paperwork to make your products. You also need paperwork to record all of your purchases and sales. One of these necessary records contains information on your cost of goods sold. This is a record that shows you how much you spent on the products you sold.
For example, say you are in the business of making and selling computers. You sold 500 computers last month. Your cost of goods sold for last month would be the amount you had to pay to make those 500 computers. So if it costs you $200 to make each computer, then your cost of goods sold for last month is 500 * $200 = $100,000.
Your accounting journal entry would look like this:
| Date | Account | Debit | Credit |
|---|---|---|---|
| April 2016 | Cost of Goods Sold | $100,000 | |
| Inventory | $100,000 |
What you've done here is debit your cost of goods sold account, while crediting your inventory account. Remember, in accounting, to debit is to add and credit is to take away for expense accounts. This increases the amount you've listed in your cost of goods account, while decreasing the amount you have in inventory. Why would you credit the inventory account? You credit the account because when you sell your products, you are subtracting from your inventory account and thus credit, or taking away from, this account.
Job Order Cost Flow
In addition to your cost of goods sold record, you can also keep track of your expenses and sales through the job order cost flow method. This method lists the cost of goods sold as part of a job, and it's usually used when you get orders that are unique to each customer.
In your computer business, you may have some people purchasing your already-made computers while other people request a custom built computer. For the custom built computer orders, you can use the job order cost flow method to track your accounting for these jobs.
For example, say you receive a custom order for a 3 GHz computer with 8GB of RAM, one Blu-ray player, and one DVD-RW player. You charge the customer $799 for this computer, and it costs you $210 to make it. In your journal, you will note everything related to this job, from the material acquisition to the sale of the item.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 5-13-2016 | Inventory | $210 | |
| Accounts Payable | $210 | ||
| Cash | $799 | ||
| Accounts Receivable | $799 | ||
| Cost of Goods Sold | $210 | ||
| Inventory | $210 |
Differences
The main difference between these two methods is that the job order cost flow method requires more entries in your journal and is more detailed. It also requires you to write these entries for each order that you receive.
Moving Costs
If you need to move amounts from any account to another, all you have to do is to debit one account and credit the other. When you debit one account, you add money to that account, and when you credit an account, you take money away from that account.
So in the following journal entry, you can see that money is moved from the inventory account to the cost of goods sold account.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 5-1-2016 | Cost of Goods Sold | $210 | |
| Inventory | $210 |
Lesson Summary
Let's review. Your cost of goods sold record shows you how much you spent on the products you sold. To calculate this amount, you multiply the number of products you sold by the cost it took to make or purchase these products. Your journal entry has you debiting the cost of goods sold account and crediting your inventory account.
Another way to record your sales information is with the job order cost flow method. This method lists the cost of goods sold as part of a job. It records each individual inventory piece for each order. You'll have as many journal entries as needed to record the job, from raw materials to receipt of cash. This method gives you much more detail than simply recording your cost of goods sold in a given period of time.
To transfer amounts from one account to another, you simply debit one account and credit the other. For example, to move $210 from inventory to cost of goods sold, you'll write this in your journal:
| Date | Account | Debit | Credit |
|---|---|---|---|
| 5-1-2016 | Cost of Goods Sold | $210 | |
| Inventory | $210 |
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