Accounting for Cost of Sales
We learn what is cost of sales, when is it recorded and the value to be recorded in the journals and ledgers. We also learn how to close the cost of sales account.
However, this lesson does not cover the calculation of cost of sales using the First-In, First-Out (FIFO) method. The FIFO method and the recording of the inventory account will be covered in a separate lesson.
Related Lessons:
What is Cost of Sales
Cost of sales refer to the cost of the goods that were sold by the business through its trading activities. Therefore, a business will only have cost of sales when it sells its goods.
Determining and recording cost of sales allows the business to determine if it makes a profit or a loss on the sales.
When goods sold are returned back to the business, the sale is cancelled. As such, cost of sales previously recorded must also be reversed.
Recording Cost of Sales
The cost of sales is recorded in the journal as follows:
1. When goods are sold
Dr Cost of sales
Cr Inventory
2. When goods are returned
Dr Inventory
Cr Cost of sales
Closing Cost of Sales Account
To close the cost of sales account, at the end of the month, the balances in the cost of sales account are transferred to the income summary account, and we start the account fresh in the following month.
Dr Income summary
Cr Cost of sales