Key Accounting Information

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Cost of goods sold (COGS) are only the costs that are directly tied to the production of a product. This is the labour that is required and any material costs actually used to make it. Any downstream costs such as marketing or distribution are not included in COGS.

The figure is shown as part of the profit and loss statement.  After the cost of goods sold is subtracted from business revenue, the gross profit is arrived at.

Cost of goods sold is calculated using the following formula:
COGS = Opening Stock Purchases Made - Closing Stock

 

You can calculate the gross profit for your business using the following procedure:

INCOME $
Revenues
Net sales revenue 0
Less COGS
Opening stock -0
Purchases made -0
Closing stock -0
Total Cost of Goods Sold  
Gross profit Revenues - COGS

 

Expenses are all business outlays for the period, other than those relating to any monies paid to business owners such as dividends and drawings.  Expenses are categorised into three areas:

  • Selling and distribution expenses -all expenses associated with developing, selling and distributing a product. Examples include shipping, advertising, staff salaries and wages.
  • Administrative expenses -all expenses associated with business administration such as purchases of office equipment, depreciation of office furniture and insurance expenses.
  • Finance expenses -all business outlays associated with the business' financing and cash flow activities. For example, the recording of bad debts, rent expense, and interest expense paid to creditors.