Cost of Goods Sold
Definition
Cost of Goods Sold (COGS) is the direct cost of the products a business sells. It includes the cost of the inventory items that were sold, not the cost of inventory still on hand.
Example
A business buys 10 items at $40 each. It sells 3 items for $75 each. COGS is $120 (3 × $40). The remaining 7 items stay in inventory at $280.
Why It Matters
COGS is subtracted from revenue to calculate gross profit. Recording it correctly shows whether the business is selling products at a profit.