Cost of goods sold (sometimes called cost of sales) is a calculation that affects the price of goods you sell, and so it is an important concept to understand and manage to keep your business taxes low.
In this article, we will look at the concept of cost of goods sold, how it is calculated, and how cost of goods sold affects your inventory, business financial records, and, most important, your business tax return.
1. What is Cost of Goods Sold
Cost of goods sold (COGS) is a calculated amount showing the value of goods used to produce products for sale. Cost of goods sold is turned into inventory and then into sales. Cost of goods sold includes value of products, of labor, and production facilities.
2. How Do I Calculate Cost of Goods Sold?
This "how to" takes you through the calculation for one product, so you can see how it is done and what information you will need to provide your CPA. You will need a CPA or tax professional to calculate COGS for your business income tax return.
Start with the basic calculation for cost of goods sold:
Beginning Inventory Cost
Plus Cost of Additional Inventory Manufactured or Purchased during the year
Minus Cost of Ending Inventory
Equals Cost of Goods Sold
3. How Do I Include Cost of Goods Sold in My Business Taxes?
In all types of business tax returns, cost of goods sold is calculated in a separate schedule and then included as a reduction to gross income in the Income section of the tax return. Here is a list of the types of specific tax returns for sole proprietors, corporations, S corporations, and partnerships, details on how to find the calculations for cost of goods sold, and where to include the calculation on the tax return.
4. What Records Do I Keep on Cost of Goods Sold?
This article discusses the types of records you need to keep to substantiate your cost of goods sold calculations. Be sure to keep specific records showing the purchase of inventory or supplies to be used in production.
5. How is Cost of Goods Included in Business Financial Records?
Rosemary Peavler, Guide to Business Finance, shows how an item moves from cost of goods sold (an expense) to an inventory item (an asset), and then how the sale of the item is accounted for.
Cost of goods sold is shown on a company's profit & loss (income statement) as an offset (deduction from) Income.
