Cost of Goods sold

Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products. These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

Statement of Cost of goods sold

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies)X 
-Purchases returnsX 
+ Direct labor (salary, wages)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of goods sold XX

Expense

As per the expense recognition concept, the expenses shall be recognized in the same period as the revenues to which they relate. Further under accrual method of accounting, the expenses have to be reported in the income statement for the period in which:

  1. The expense best matches the revenue/sales.
  2. The expense is used or expires this period.
  3. There is uncertainty in measuring future benefit of cost.

There are two major classification of expenses as:

  1. Operating expenses: These involve major activity expenses for operating the business. The operating expenses include: cost of goods sold, general and administrative expenses, etc. These expenses can easily be sorted by department and product line.
  2. Non-operating expenses: These expenses relate to incidental activities of the company. Such expense includes interest expense which is not directly related to main activity of business.
Related article  Accounting for Work In Progress

Cost of goods sold VS Expenses

The differences between cost of goods sold and expenses are given below:

Basis of differenceCost of goods soldExpenses
MeaningCOGS refer to all the direct costs required in making the products or rendering services.Expenses refer to all those expenditures that occurs during the daily operations of the business.
Production linkedCOGS are directly linked to the production or manufacturing of any finished product.These may or may not be directly linked to the production as it also consists of non-operating expenses.
Subset ofCOGS is subset of expenses.Expenses consist of all the cost related to goods sold.
Disclosure in Financial StatementCOGS falls under debit side of income statement.All the debit side of income statement are expenses.
Accounting standardsCOGS are not defined under any accounting standards.Expenses are defined under accounting standards to include operating and non-operating expenses.
Examples– Direct materials required for the production of goods and services
– Labor tied to production.
– Rent and utilities
– Sales and marketing expenses
– Insurance expenses
Point of originWhen the goods are produced or manufactured, the cost related to goods sold happen.Expenses incur to run daily operations of the business including costs related to production.