Cost of Goods Sold (COGS) is one of the elements in Profit and Loss Report within trading company. The calculation of COGS in the current period is required to prepare a financial report especially profit and loss statement. The accuracy on COGS calculation will influence the profit or loss obtained by the company. Thus the more precise the COGS calculation the more accurate report company’s profit or loss
In calculating COGS report, the first thing need to know is the elements to build COGS. These elements are beginning inventory, final inventory, and net purchase.
Beginning Inventory
The beginning inventory is the available product supplies by the beginning of a period or current fiscal year. Beginning inventory balance of the trading company is presented on the trial balance or on the company’s balance sheet or previous year’s balance sheet.
Final inventory. The final inventory is the goods supplies in the last period or current year book. The inventory ending balance will be found from the company’s adjustment data by the end of the period.
Net Purchase. Net purchases are the goods purchase conducted by the company, either in cash or on credit, plus the purchase delivery cost and deducted by the purchase discount and purchase returns.
The COGS formulas are flexible, means is the elements are incomplete, such as there is no sales return occurred, or there is no purchase discount, or delivery cost, then the COGS is calculated without adding those elements .
Based on these data, the balance elements of COGS are beginning inventory on the trial balance and ending inventory on the adjustment data, net purchase is in the trial balance, such as purchase, purchase return, and purchase discounts. Even though the delivery cost is not stated in the data, the COGS calculation is conducted as it should be.
Cost of Goods Sold is very important, because the precise COGS calculation results in the accountable and accurate financial statements, especially income statement. Due to the importance of COGS calculation, it is expected that the COGS method should be well understood and resulting the reliable financial statement determine the right policy for the company’s progress.
