What is a Cost of Goods Sold Journal Entry?

Cost of Goods Sold Journal Entry

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Cost of Goods Sold Journal Entry

A Cost of Goods Sold (COGS) journal entry is made in a company’s accounting records to record the cost associated with goods or services that have been sold to customers. This is a critical step in accurately capturing the financial performance of a company, as the COGS directly impacts the company’s profit margins.

The basic journal entry to record COGS involves two accounts: Inventory and Cost of Goods Sold.

Example of a Cost of Goods Sold Journal Entry

Let’s assume a company called TechGadgets sells electronic items. TechGadgets sold 10 units of a particular gadget, with each unit costing them $100.

In this case, the Cost of Goods Sold (COGS) for the 10 gadgets sold is $1,000 (10 units * $100 per unit).

The company would record this as a journal entry in their accounting system as follows:

Cost of Goods Sold$1,000

This journal entry increases the Cost of Goods Sold account by $1,000 (a debit to an expense account increases its balance), which will reduce the company’s net income when the income statement is prepared.

At the same time, it decreases the Inventory account by $1,000 (a credit to an asset account decreases its balance), which reflects the fact that the company now has fewer gadgets in its inventory due to the sale.

This is a simplified example, but it illustrates how a COGS journal entry works. In practice, COGS journal entries can become more complex, depending on the nature of the business and the accounting methods it uses.

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