Cost of Sales in Accounts

Cost of Sales CalculatorWhat is Cost of Sales? The definition of cost of sales is the total amount a business spends to make or buy the goods or services that you sold. It includes direct costs of both the product and overheads.

We have provided a COS calculator at the end of the page. It allows you to enter your figures and will calculate the stock, COS and gross profit.

The figure appears on the profit and loss account, which is also known as the income statement. It appears below the sales figure. Sales less cost of sales equals the gross margin. The example below shows sales of 9000.00, the cost of 4000.00 and a gross profit of 5000.00.

Cost of Sales Formula

To calculate the actual cost of the goods sold, you will need to complete the following calculation.

Opening Stock + Plus Purchases – Less Closing Stock = Cost of Goods Sold

An example is a business that has an opening stock of 5000.00, during the year it purchases stock of 3000.00 and at the end of the year the closing stock is 4000.000

The figures would be as follows:

5000.00 + 3000.00 – 4000.00 = 4000.00 Cost of Goods Sold.

There are other costs which are also direct cost of selling a product or service. They can include things like wages paid to staff and delivery costs for receiving the goods.

In the example used above, we can include wages for manufacturing the product of 1000.00, a commission of 500.00 and delivery charges of 50.00. The profit and loss or income statement will now look like this:

Profit and Loss for ABC Computers for the period 1st - 31st March
Cost of Goods Sold4000.00
Delivery Costs50.00
Total Cost of Goods Sold5550.00
Gross Profit3450.00

Cost of Sales Accounting

If you are using an accounting software package that tracks stock then as long as the purchase and sales invoices are allocated to the correct stock code, it will complete the calculation. An example is a business sells computer which it allocates a stock code of 134.

The business orders stock of 4 computers in March at 300.00 each (allocated to stock code 134), the figure would be posted to the stock asset on the balance sheet.

If you are using a manual system you will need to make the necessary adjustments.

Balance Sheet for ABC Computers as at 31st March

In April is sells two computers at 500.00 each (allocated to stock code 134), the reports would then be as follows:

Balance Sheet for ABC Computers as at 31st March

The profit and loss account would then show:

Profit and Loss for ABC Computers for the period 1st - 31st March
Cost of Goods Sold600.00
Gross Profit400.00

Cost of Sales Calculator

We have designed two calculators. The fist will calculate the cost of goods sold, and the second will calculate the gross profit and percentage.

Cost of Goods Sold Calculator

To use this tool enter the figure for opening stock, purchases for the year and closing stock. The figure will automatically be calculated for you.

Gross Profit Calculator

This calculator will work out the total net profit, gross profit and gross profit percentage of sales.  To use the calculator, enter the figures for sales, cost of sales and business expenses. Business expenses include all other costs which are not included in the cost of sales. Examples of additional costs are utilities, wages, post, rent and general expenses. 

If you need to record all the business expenses to get a total, you can use our Profit and Loss template.

Further reading can be found on the Accounting Coach website.

Return from Cost of Sales to Profit and Loss Statement.