Cost of goods sold is the direct cost of producing or purchasing the goods a business sold in a period, subtracted from revenue to calculate gross profit.
Cost of goods sold captures the direct costs tied to what you actually sold: the purchase cost of inventory, raw materials, and direct labour. It excludes overhead like rent and administration, which are operating expenses. Revenue minus COGS gives gross profit, the first measure of profitability on the income statement.
COGS is calculated as opening inventory plus purchases minus closing inventory, so an accurate inventory count is essential. Getting COGS right matters for both financial reporting and tax, because it directly determines gross margin and taxable income for product-based businesses.
A retailer starts with $20,000 of inventory, buys $60,000 more, and ends with $15,000. COGS is $20,000 + $60,000 − $15,000 = $65,000, subtracted from sales to find gross profit.
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