Hence, usually, the inventory account reflects the cost of the product purchased until sales take place. Therefore, for retailers, the product cost is the cost price or the purchase price of the product unless they incur any more specific costs to bring the product to the saleable condition. It is for offsetting the expenses from the sales revenue to determine the profit or loss.Ī business usually manufactures products or buys products/services for retailing and distribution. Gross profit shows you how much you are spending on COGS. Along with being on oh-so important financial documents, you can subtract COGS from your business’s revenue to get your gross profit. ![]() It also shows your business’s sales, expenses, and net income. This financial statement reports your profit and losses. Therefore, while recognizing its revenue as it occurs, a business must also acknowledge the COGS in the same period. Why is COGS important Your income statement includes your business’s cost of goods sold. The matching principle suggests that a company should report its expense related to the sales revenue in the income statement. COGS as a deduction from the sales revenue is in line with the matching principle of accounting. To calculate gross profit, deduct COGS from the sales revenue of the company. All those costs sum up as the cost of goods sold(COGS).
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