Cost of Goods Sold (COGS)

Cost of goods sold is the direct cost of the products a business sells during a period.

Cost of goods sold, often shortened to COGS, is the cost tied directly to the goods that left the shelf, workshop, warehouse, or production line. For a retailer, it usually includes the cost of stock sold. For a maker, it may include materials and direct production costs.

COGS is different from ordinary overheads such as rent, software, advertising, or office costs. Those expenses may help the business operate, but they are not usually the direct cost of the goods sold.

Where Cost of Goods Sold Appears

You will usually see COGS in:

profit and loss statement reports
gross profit and margin calculations
product, item, and inventory settings
supplier bills for stock purchases
accountant year-end stocktake work
pricing and business planning reviews

The ATO’s trading stock guidance explains that businesses may need to value trading stock at the end of the income year.

How Cost of Goods Sold Works In Practice

COGS connects sales to the direct cost of delivering those sales. A simple version is:

Opening stock + purchases and direct stock costs - closing stock = cost of goods sold

Accounting software helps by connecting supplier bills, products, inventory movements, sales, and reports. The more consistently stock purchases and sales are recorded, the easier it is to see gross profit without waiting for a spreadsheet clean-up.

Simple Example

A homewares shop starts July with $18,000 of stock. During the month it buys another $7,000 of stock. At month-end, it still has $15,000 of stock on hand.

Its COGS for the month is $10,000:

$18,000 + $7,000 - $15,000 = $10,000

If the shop made $25,000 in sales, its gross profit before overheads is $15,000.

Why Cost of Goods Sold Matters

COGS shows whether the business is making enough on each sale before overheads are considered. If COGS rises but prices stay the same, gross profit can shrink even when sales look healthy.

For Australian businesses that hold stock, year-end stock values matter for income tax reporting. The ATO also has simplified trading stock rules for eligible businesses when the value of trading stock changes by $5,000 or less.

Easy Way To Remember It

COGS is the cost of what you sold, not the cost of running the whole business.

How Gimbla Can Help

Gimbla helps keep invoices, bills, items, bank records, and profit reports connected. That gives owners and accountants cleaner records for reviewing direct costs, gross profit, GST, and year-end stock questions.

Helpful Gimbla Guides

In Short

Cost of goods sold is the direct cost of the products sold. It is the number you subtract from sales to understand gross profit before overheads.