Cost of Goods Sold
The direct cost of the inventory actually sold during a period.
Formula
Variables
Example
Open $20k + buy $50k − close $15k = $55k COGS
How it works
Cost of goods sold is the value of the inventory that was actually taken out of stock and sold during the period. You start with what you already had, add what you bought, then subtract what is still left at the end, because that closing stock was not sold. The result is the cost attached to the goods that left the business through sales.
When to use it
Use this formula when you need to find the direct cost of items sold in a trading or retail business over a month, quarter, or year. It is also useful when preparing profit calculations, since gross profit depends on COGS.
Worked example, step by step
Opening inventory = $12,000 Purchases = $38,000 Closing inventory = $9,000 COGS = Opening inventory + Purchases - Closing inventory COGS = 12,000 + 38,000 - 9,000 COGS = 41,000 Final answer: $41,000
Common mistakes to avoid
- Subtracting purchases instead of adding them
- Using sales revenue instead of closing inventory
- Forgetting that closing inventory reduces COGS because it was not sold
Did You Know?
COGS excludes overheads like rent and admin — only costs tied directly to producing the goods sold.
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BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
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BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.
Quick Ratio (Acid Test)
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