Understanding "Cost of Goods Sold"

As a  small business owner, are you confused about what “Cost of Goods Sold” really means? Often the tax lingo is confusing and sometimes people fail to read the fine print and then skip that section on their taxes. You could be missing out on some great money.

Definition of “Cost of Goods Sold – COGS”

Investopedia states: The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales".

Basically, think about what you are spending on what you sell.

Cost of goods sold is the direct cost of the items sold.

When a business purchases its inventory, the inventory is an asset until it is sold.

For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be omitted.

How to Calculate Cost of Goods Sold:

According to irs.gov:

·      Beginning inventory is the cost of merchandise on hand at the beginning of the year that is available for sale to customers. A manufacturer or producer should include the total cost of raw materials, work in process, finished goods and materials and supplies used in manufacturing the goods as part of the beginning inventory amount.

·     The inventory at the end of the year is also known as closing or ending inventory. The ending inventory will usually become the beginning inventory for the next tax year.

Here at Professor Tax USA you can always count on us to provide you with the information and service needed to help your business run smoothly. For a free consultation feel free to contact Professor Tax. To learn more about tax laws, visit our blog, NewYear, New Tax Laws.