Cost of goods sold

Cost of goods sold is an expense account with a normal debit balance found in the ledger of merchandising firms that buy and resell finished goods. Using the perpetual inventory system, when an item is sold from inventory, the merchandise inventory account is credited for the cost of the item, and cost of goods sold is debited for the same amount. Because cost of goods sold is often the most important of all the expense accounts in a retail or merchandising firm, it is separated from the other expense accounts and subtracted first from sales revenues, with the remainder called gross margin. All the firm’s other expenses are then subtracted from gross margin. A well-known model for determining the cost of goods sold is: beginning inventory + purchases of inventory inventory available for sale – ending inventory cost of goods sold Cost of goods sold provides important data for manufacturing firms, and their INCOME STATEMENTs give the same treatment to the cost-of-goods-sold account—that is, subtracting it first from sales revenues to obtain gross margin.