All You Need To Know About the Cost of Goods Sold

Whenever selling any product, not the entire revenue you earn is the profit. In almost every case, the business has to bear certain expenses to sell its goods, and all of them are to be calculated to find the profit. It is here that cost of goods sold puts into play. Let’s learn what comes in it if it is an expense, how important it is, and how to realize the cost of goods sold.

What is the Cost of Goods Sold?

The cost of goods sold is a method to calculate the expenses coming while selling goods. It allows you to find out the costs over the sale of products so that as a business owner, you can easily understand the pricing structure and profit margins. You are required to calculate the cost of goods sold for the tax return of your business, as it will lessen the income of your business and allow you to reduce your payable tax bill.

Why Is It Necessary?

Finding the Net Income

There are several reasons why every business needs to figure out the cost of goods sold. Approaching an accounting firm in New York for this purpose can greatly help you. As COGS is an expense, it plays a crucial role in the tax returns of your business and can help you lessen the tax bill. Reducing the COGS from the gross income can help you evaluate your net income and find out the amount of taxes you need to pay.

Importance in Other Areas

However, it plays an essential role in other areas too. For example, as a business, you have to set pricing to keep your profit margins, which will also cover the business expenses. Finding the cost of goods sold will enable you to come to prepare a formula for setting prices that are not only competitive but profitable as well.

How to Find it?

Now that you have understood the cost of goods sold and why it is important, let’s figure out how it is evaluated:

1. Setting Up Essential Components

The process begins with setting up the essential components. One approach is to find out the inventory costs that you had at the beginning, additional costs of inventory purchased, subtract the final inventory costs left with you at the end. The remaining number will be the cost of goods sold. You can deduct this number from gross revenue, lessening the overall tax bill.

2. Direct Vs Indirect COGS

Next, you need to find out direct versus indirect COGS. Direct costs include the costs of purchasing goods for resale or parts for making products. Packaging costs, supplies for production, inventory of finished products, and overhead costs related to manufacturing can also be included in it. Whereas, indirect costs can include depreciation, administrative equipment, storage of products, salaries of staff looking after the products also come under it.

Final Thoughts

Calculation of the cost of goods sold can be quite complex, and as a business owner, you are already overwhelmed with several responsibilities. Hence, it is advised that you should approach an accounting firm in New York City. They will help you with handling your books, calculating the profit, and a lot more.

Sarah K, a professional writer who share interests in different creative niches. Her ideas and tips towards such niches have contributed to the online community.