What Kind of Account is COGS?

In accounting, inventory refers to the goods or products involved in selling to customers. The difference between inventory and supplies can be confusing for business owners, but understanding this distinction is crucial for proper accounting practices.

Supplies are expenses incurred in the normal course of business, such as purchasing pricing stickers for a new shipment of widgets. These costs are listed among the company's assets and are classified as an expense when they relate to ongoing operations.

On the other hand, inventory is related to an asset, making it a cost. For example, if a retail business purchases a new building, this purchase is considered a cost because it relates to an asset. The most common way to calculate the Cost of Goods Sold (COGS) is by taking the beginning annual inventory amount, adding all purchases, and then subtracting the year-ending inventory from that total.

When does the cost of inventory become an expense? COGS becomes an expense when it is subtracted from revenue, helping determine a company's gross profit. Businesses with a product to sell can list COGS on their income statement, which allows them to deduct costs for products manufactured or purchased with the intent to resell.

COGS is the accounting term used to describe expenses incurred in producing goods sold by a company. For online retailers, examples of COGS include bubble wrap, tape, and cardboard used for shipping, as well as the shipping itself. Any expense not part of the cost of producing a good is not considered COGS. Online retailers may have similar COGS costs as traditional retailers, and small businesses transacting through online markets such as eBay and Etsy are required to pay taxes and prepare financial documents like other traditional businesses.

In summary, understanding the difference between inventory and supplies is essential for proper accounting practices. COGS refers to the expenses incurred in producing goods sold by a company and becomes an expense when subtracted from revenue to determine gross profit.

What kind of account is cogs