How to record cost of goods sold: COGS journal entry

In order to prepare financial statements for your business, like an income statement and balance sheet, you’ll need to calculate your cost of goods sold (COGS). But how do you actually go about recording COGS in your books once you’ve calculated it? The answer is by creating a COGS journal entry. 

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Below, we briefly review what COGS is and how you should be recording it in a COGS journal entry. We also walk through a number of COGS journal entry examples and answer other common questions about how you should be recording cost of goods sold for your business. 

What is cost of goods sold?

Cost of goods sold (COGS) is a category of business expenses that includes all of the production costs directly associated with manufacturing, fabricating, or otherwise producing the goods sold by your business during an accounting period. 

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COGS should include the raw materials and components that make up your product, the direct labor costs for production staff, utilities used in production, and any other direct costs associated with production.  

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If your business is service oriented and does not sell physical goods, you would calculate cost of sales (COS) or cost of revenue (COR) instead of COGS. 

What is a COGS journal entry?

A COGS journal entry is how you actually go about recording your business’s cost of goods sold in your book of accounts so that it can be tracked over time and used in the preparation of financial statements. It will consist of debits made to your COGS expense account and credits made to both your purchases account and inventory account.

How to record cost of goods sold (COGS)

Recording a COGS journal entry is a relatively straightforward process. Just follow the steps below to get started. 

1. Choose the reporting period

In order to calculate and record your company’s COGS, you’ll first need to define your reporting period. Are you calculating COGS on a yearly, quarterly, or monthly basis? Without knowing the reporting period, it’ll be impossible to perform the calculations that you need to in order to find your COGS. 

2. Gather the required data

Next, collect the information that you’ll need to use to calculate COGS for the period. This will include your:

• Beginning inventory: The value of the inventory you carried over from the prior period
• Purchases: Costs incurred during the period to secure new inventory
• Ending inventory: The value of the inventory remains at the end of the period, which will carry over into the next

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Where this information lives will depend on the systems that your business uses. Information about purchases made during the period can be found in your expense management platform, while information about beginning and ending inventory can be found in your inventory management system. Be sure that you are valuing your inventory properly, according to whatever inventory accounting method your business uses.

3. Calculate your COGS

Armed with this information, you can calculate your cost of goods sold for the period. To do so, you should use the COGS formula, adding the value of your new inventory purchases to the value of your beginning inventory, and then subtracting the value of your ending inventory: 

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COGS = (Beginning Inventory) + (Purchases) - (Ending Inventory)

4. Create a COGS journal entry

Finally, you can create an accounting entry for the cost of goods sold. The journal entry should include the following information:

• The date that COGS was calculated
• The COGS figure that you calculated above, entered as a debit
• Notes about what expenses contributed to COGS
• Credits to your purchases account and inventory account

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As a note, the credits that you make to your purchases and inventory accounts should equal your COGS. 

COGS journal entry example

Consider a company that starts the accounting period with a beginning inventory value of $45,000. During the period, the company spends an additional $10,000 on new inventory, and it ends the period with an ending inventory value of $35,000. 

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To calculate its COGS, the business would perform the following equation:

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COGS = $45,000 + $10,000 - $35,000 =  $20,000

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When the company records its COGS as a journal entry, it would do so by debiting its COGS expense. It would then credit its purchases account by the amount of purchases made during the period, with the remaining balance becoming a credit for the inventory account.

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Recording COGS

If you still have questions about how you should be recording COGS, consider the following questions. 

Is cost of goods sold a debit or credit balance?

Cost of goods sold is an expense account for your business. This means that it reduces your company’s net income, profit, and retained earnings. With this in mind, it should be recorded as a debit. Debits will increase the balance of your COGS expense account, while credits will decrease it.

Does COGS go on your balance sheet?

No, COGS should not be directly listed on your balance sheet. That being said, your inventory—a component of COGS—will appear on your balance sheet as a current asset. 

Does COGS go on your income statement?

Yes, your cost of goods sold should be included on your income statement for the reporting period. It can either be listed in the statement’s expenses section—along with indirect costs like SG&A expenses, operating expenses and overhead costs—or in the revenue section, depending on your preferences. When listed in the revenue section, it allows you to calculate gross margin before diving into expenses. 

Accurate COGS accounting powered by Ramp

Your company’s cost of goods sold is a critical piece of information that can inform everything from your budget and inventory strategies to how you price your product and everything in between. Knowing this, it’s important that you are confident in your calculations—and that you can perform them quickly when the time comes. Ramp can help on both fronts. 

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Ramp’s expense management platform empowers you to capture, categorize, and monitor all of your business’s expenses—including those that go into COGS—with greater accuracy and speed than possible through manual processes. Meanwhile, with Ramp’s accounts payable software, you can eliminate manual data entry, automate payments to vendors and suppliers, and close your books faster than ever. 

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Try Ramp for free, or request a demo to get started.