Cost of goods sold

Cost of goods sold (COGS) is the total cost, whether from purchase or manufacturing, of only the products you actually sold during the period. It is subtracted from your sales to determine what you have left before other expenses (gross margin).

At a glance

The actual cost of the products you’ve sold, not those still in inventory
Includes materials, purchased goods, and labour used to manufacture
Sales minus COGS = gross margin (what remains before overhead expenses)
It’s calculated as follows: beginning inventory + purchases for the period, minus ending inventory
A well-managed COGS provides an accurate gross margin, which is the basis for truly profitable pricing

Why it matters

Imagine a coffee shop that sells $10,000 worth of coffee in a month. The beans, milk, and cups used to make that coffee cost the shop $3,000, that’s its COGS. Without this figure, it’s impossible to know if each sale is actually profitable. Poorly tracked COGS (incorrectly counted inventory, overlooked costs) can artificially inflate or deflate your profit, and even skew the taxes you pay. Bankeo connects you for free with a verified accountant or CPA who will set up a reliable inventory tracking system, and we’ll be there for you every step of the way.

Let’s go back to the coffee example: with $10,000 in sales and $3,000 in COGS, there’s $7,000 left over gross margin, or 70% of sales; this margin is then used to cover rent, salaries, and taxes. COGS is listed under the income statement and has a direct impact on metrics such as the EBITDA. For business accounting, the Canada Revenue Agency explains how to calculate the cost of goods sold in its T4002 guide (source). When calculated correctly, it tells you exactly how much profit you make on each sale, and Bankeo can connect you with a vetted accountant at no cost to ensure the accuracy of your inventory tracking.

Frequently asked questions

What exactly is cost of goods sold?

It’s the cost of producing or purchasing only the products you actually sold during the period. A sweater still on the shelf isn’t included; it will be included in the month you sell it.

How is it calculated?

You take the value of inventory at the beginning of the period, add your purchases, and then subtract the value of inventory remaining at the end. The result is the cost of the products shipped to your customers.

How does it differ from other expenses?

COGS includes only the direct cost of the products sold. Rent, administrative expenses, and advertising (overhead costs) are accounted for separately. Bankeo provides you with a vetted accountant or CPA for free to help you properly separate the two, and we’re here to support you every step of the way.