Understanding Cogs Accounts: A Breakdown

Cogs accounts, also known as Cost of Goods Sold (COGS), are a crucial aspect of an organization's accounting system. It is essential to understand how cogs accounts work, especially for businesses that deal with inventory management. In this article, we will delve into the world of cogs accounts and provide a comprehensive overview.

Calculating Cogs Accounts

To calculate cogs accounts, you need to consider the unit cost of your goods or services. Let's use an example to illustrate how it works. Suppose our unit cost was $395 for the month of July, and at the close of business on July 31, we had 90 units in stock. To find our ending inventory at cost, we multiply the unit cost by the number of units: $395 x 90 = $35,550.

Now, to determine our starting inventory at cost, we need to subtract our ending inventory from our total cost. In this case, our starting inventory would be $24,000 ($35,550 - $11,550).

Recording Sales and Cogs Accounts

When a sale is made, it results in a journal entry that records the amount of the sale and the cash or accounts receivable. The Cost of Goods Sold account is also debited at this time to reflect the cost of the merchandise sold.

Perpetual Inventory System

In a perpetual inventory system, there are no Purchases accounts used. Instead, we rely on our ending inventory from the previous month to calculate our starting inventory for the current month. For example, last month our unit cost was $400 and we had 60 units in stock. Our beginning dollar amount for finished goods inventory is based on this information.

Total Manufacturing Costs Incurred during the Year

In addition to cogs accounts, it's essential to consider total manufacturing costs incurred during the year. This includes Purchases of Direct Materials (including Freight In) and other relevant expenses.

In conclusion, understanding cogs accounts is vital for businesses that deal with inventory management. By calculating your unit cost and using the perpetual inventory system, you can accurately record sales and manage your finances effectively.