Bookkeeping for Inventory Transactions

Your income statement includes your business’s cost of goods sold. The first type of inventory transaction you’d make would involve buying raw materials inventory, or the materials you use to make your products. You’ll have to have a basic understanding of the inventory cycle and double-entry accounting methods to make the proper entries. In recording a journal entry for sales, you’ll need to pass entry for sales—that is, move the information to all of the different accounts where it needs to be recorded.

On the income statement, the cost of goods sold is an expense account, and hence, it is increased by debits and decreased by credits. Inventory and purchases as assets accounts will also increase by debits and decrease by credits. However, when making a journal entry, the cost of goods sold would be debited and purchases https://kelleysbookkeeping.com/employer-liability-for-unemployment-taxes/ and inventory accounts would be credited. This shows that the assets have been sold and their costs have been moved to the COGS. The cost of goods sold is an expense account, so it is a debit entry. As an expense account, the cost of goods sold is increased by a debit entry and decreased by a credit entry.

Why is tracking cost important?

Then, the purchases made throughout the year are added to the inventory to calculate COGS. Moreso, any unsold inventory at the end of the year is considered the ending inventory which is subtracted from the total of the beginning inventory and purchases to arrive at the COGS. This COGS formula, when adjusted with the corresponding figures, gives a final figure for the cost of goods sold. However, before passing a journal entry, this is necessary to find the value of inventory consumed.

To create a journal entry in your general ledger or for a sale, take the following steps. Debits and credits work differently based on what type of account they are. For instance, cash is an asset account, while cost of goods sold is an expense account. Cost accounting methods usually vary from one industry to another. For instance, the cost of goods sold for a baker would be the cost of ingredients and labor if he/she has an assistant who helps produce the baked item for sale. Only the costs directly attributed to the sales are included in the COGS.

Calculate COGS

First in, the first out method values inventory at the earliest value of inventory. The cost of goods sold is measured according to the prior inventory purchased rather than the recent one. When calculating COGS, the first step is Recording A Cost Of Goods Sold Journal Entry to determine the beginning cost of inventory and the ending cost of inventory for your reporting period. In other words, divide the total cost of goods purchased in a year by the total number of items purchased in the same year.

When you purchase materials, credit your Purchases account to record the amount spent, debit your COGS Expense account to show an increase, and credit your Inventory account to increase it. To find the right COGS figure for each of your products, you’ll need to multiply the number of units sold by the cost of each unit. With just a tiny bit of Excel-fu, this can be set up to calculate automatically.