In this journal entry, the credit of $10,000 in the inventory account comes from the balance of the beginning inventory ($50,000) minus the balance of the ending inventory ($40,000). And the purchases account of $200,000 will be cleared to zero when we close the company’s accounts at the end of the accounting period. Your cost of goods sold record shows you how much you spent on the products you sold.

• This is posted to the Cash T-account on the credit side beneath the January 14 transaction.
• Knowing your business’s COGS helps you determine your company’s bottom line and calculate net profit.
• Expenses, for example, are increased with debits and decreased with credits.
• But to calculate your profits and expenses properly, you need to understand how money flows through your business.

Depending on the business’s size, type of business license, and inventory valuation, the IRS may require a specific inventory costing method. However, once a business chooses a costing method, it should remain consistent with that method year over year. Consistency helps businesses stay compliant with generally accepted accounting principles (GAAP). Typically, calculating COGS helps you determine how much you owe in taxes at the end of the reporting period—usually 12 months.

Journal entry to record cost of goods sold

We will analyze and record each of the transactions for her business and discuss how this impacts the financial statements. Some of the listed transactions have been ones we have seen throughout this chapter. More detail for each of these transactions is provided, along with a few new transactions.

If there was a debit of $5,000 and a credit of $3,000 in the Cash account, we would find the difference between the two, which is $2,000 (5,000 – 3,000). The debit is the larger of the two https://accounting-services.net/bookkeeping-colorado/ sides ($5,000 on the debit side as opposed to $3,000 on the credit side), so the Cash account has a debit balance of $2,000. Some accounts are increased by debits and decreased by credits.

Create a journal entry

Since this figure is on the credit side, this $300 is subtracted from the previous balance of $24,000 to get a new balance of $23,700. The same process occurs for the rest of the entries in the ledger and their balances. Notice that for this entry, the rules for recording journal entries have been followed.

• Understanding the meaning of each debit and credit can be tricky when you’re dealing with returns.
• In other words, a journal is similar to a diary for a business.
• Line items such as inventory and accounts receivable are under constant review by auditors at the end of the accounting period, making accuracy a priority.
• The journal entry for cost of goods sold is a calculation of beginning inventory, plus purchases, minus ending inventory.
• During inflation, the FIFO method assumes a business’s least expensive products sell first.

Get the 411 on how to record a COGS journal entry in your books (including a few how-to examples!). Recognition of cost of goods sold and derecognition of finished goods (Inventories) should also be consistent with the recognition of sales. If it is not consistent, then the cost of goods sold and revenues will be recognized in the financial statements in a different period. And it is not in compliance with the matching principle, resulting in the over or understated profit during the period. In your computer business, you may have some people purchasing your already-made computers while other people request a custom built computer.

Free Profit and Loss Statement Template

But it’s still important to make sure that there’s an accounting record of every sale you make. This way, you can balance your books and report your income accurately. The above example shows how the cost of goods sold might appear in a physical accounting journal. The entry may look different in a digital accounting journal. For example, a plumber offers plumbing services but may also have inventory on hand to sell, such as spare parts or pipes.

In addition to your cost of goods sold record, you can also keep track of your expenses and sales through the job order cost flow method. This method lists the cost of goods sold as part of a job, and it’s usually used when you get orders that are unique to each customer. On January 3, record cost of goods sold journal entry there was a debit balance of $20,000 in the Cash account. Since both are on the debit side, they will be added together to get a balance on $24,000 (as is seen in the balance column on the January 9 row). On January 12, there was a credit of $300 included in the Cash ledger account.