COGS in QuickBooks®
Tracking costs within a business demands attention to detail as well as specificity of the category for the particular cost. Accounting systems such as QuickBooks® normally label accounts according to the predominant category of expenses, such as ‘Office Expenses’ for printer ink and office-related purchases, or ‘Income Tax Expense’ for payments made to the federal government. The manufacture, production and sale of goods and services warrants a special type of account to track the input costs: ‘Cost of Goods Sold’, or COGS, refers to the accumulated costs associated with the creation of a good or service for sale by a business. This important distinction allows the business owner to accurately identify the total input costs for their product, as well as determine their Gross Profit (Sales – Cost of Goods Sold) and other pertinent calculations and ratios.
How is Cost of Goods Sold Calculated?
A business’s total COGS, as shown in a multi-step income statement, is actually a reflection of multiple components interacting within a simple formula: Beginning Inventory + Net Purchases (purchases less returns and allowances) – Ending Inventory. Depending on the format of the income statement, each of these values will show systematically immediately following the Total Sales/Revenue value, and before the Gross Profit value:
Total Revenues XXX
Cost of Goods Sold
Beginning Inventory XX
Net Purchases XX
Total Goods Available for Sale XXX
Less: Ending Inventory (XX)
Cost of Goods Sold XXX
Gross Profit/Loss XXX
The COGS calculation can be more specifically separated into three sub-categories: direct labor, materials, and overhead. Businesses providing services also include payroll taxes and benefits of employees generating billable hours into their COGS calculation. While the COGS formula can be customized to best fit the needs of a particular business, generally accepted accounting principles (GAAP) specifies COGS to include “…all costs of purchase, costs of conversion and other costs incurred to bring inventory to the present location and condition”.
Cost of Goods Sold in QuickBooks®
QuickBooks® adds the Cost of Goods Sold account to the Chart of Accounts depending on the industry specified in the settings, or with the first addition of an inventory transaction. COGS can be manually referenced in bills, credit card payments or checks just as other expenses are through the utilization of the Expenses drop-down screen; however, the most accurate application of COGS in QuickBooks® is through the use of the Items List. By adding items coded as COGS and referenced to specific inventory items, further detail may be added to invoices and sales receipts for customer review. When an inventory item that has been detailed with cost of goods sold information is sold, the Inventory account is deducted for the cost of the particular item, with the same value added to the Cost of Goods Sold account.