Plain definition
Cost of goods sold, or COGS, is the cost of inventory or products that were sold during the period. For a retailer it may include purchase cost and directly attributable costs; for a manufacturer it reflects the cost of goods completed and sold according to its accounting policy. It is matched with revenue from those sales, so buying inventory and selling inventory are different events.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A retailer starts with inventory, buys , and ends with after a count. Cost of goods available is , and COGS is after subtracting ending inventory. If June sales are , gross profit is before operating expenses.
| Opening inventory | |
|---|---|
| Purchases | |
| Ending inventory | |
| Cost of goods sold |
The costing method, returns, shrinkage, write-downs, freight, and manufacturing overhead require policy and evidence. A formula is only as reliable as the inventory records and count.
Why it matters
If purchases are treated as COGS immediately, a stock build makes margin look weak; if sold inventory remains in assets, margin looks overstated. The error can lead management to change prices or procurement based on a false gross margin.
Practical consequence
Reconcile inventory movement to purchase records, sales records, and physical counts. Review unusual gross-margin changes by product and trace them to price, quantity, cost, loss, or coding. Document the costing method and investigate count variances promptly rather than carrying them as an unexplained plug.