Items you had left at the end of last period If they buy in 200 more items and sell 300 (so leaving 150 items unsold), the accounts would look like this: PERIOD 2 In the next trading period the business has £750 of opening stock (250 items that cost £3). The effect of closing stock is to turn what may have looked like a loss into a profit, by matching the actual costs of the goods sold, to the income generated on sales in this trading period.Īlso to note in this example is that the business has sold £1,250, but has to pay £1,500 so they have negative cash flow of £250. Purchases include everything that you have bought in the period but, as some goods are left in stock at the end of the period, they need to be deducted from the purchases figure to give the cost of sales. Subtract the value of items not sold during as they are not part of the cost of sales in this periodĬost of sales = £1,500-£750=£750 OR 250 items sold x £3 = £750 Minus closing stock because it has not been sold So not quite as simple as when you sold all the stock.Ĭost of sales formula for goods and productsĬost of sales = cost of items sold = opening stock + purchases – closing stock = PERIOD 1 That means, you paid £1,500 for the 500 items, and sold half those items for £1,250. but there’s a further adjustment to make in your accounts to reflect that you still own some of the items.įor example, you may buy in 500 items for £3 each and sell 250 for £5 each leaving 250 in stock valued at £3 each (stock is always valued at cost unless that is less than you would expect to realise by selling it). When you buy in more goods than you sell, it may look as though you have made a loss and have no tax to pay. The formula is sales income – cost of goods sold = gross profit.

If you buy in goods to sell and don’t hold any stock, also known as inventory, then this is fairly straightforward. In this guide we’ll explain both approaches and give you the formulas for calculating cost of sales for both goods/products and services. How you approach your cost of sales depends on whether your business sells goods or services. It’s important that you track the costs to ensure that you’re always profitable. Cost of sales, sometimes known as cost of goods sold (COGS), is simply the cost involved in directly producing the goods or services that you actually sell.

Cogs accounting definition