The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.

Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.

When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.

Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.

In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses or they have direct labor costs.

At any point in time, the cost of items you purchase are in two different accounts:

1. 1. The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
   2. The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.

It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.

If your inventory purchases have been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, we can help you find out why and can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.

If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.

In small business, accounting refers to a set of tasks that revolve around maintaining a general ledger – your books — and preparing financial statements. Beyond small business accounting, there are many more aspects to accounting. In this article, we’ve prepared a glossary of accounting terms so you can discover the larger world of accounting.

Cost accounting. This type of accounting looks at the cost of items for sale. It’s especially useful in manufacturing, construction, or even restaurants where dozens or even hundreds of components are purchased and assembled to make the items that are for sale. Cost accountants account for and evaluate these costs to determine when they are too high or low and need to be repriced or purchased in a different way.

Cost accounting can be applied to small businesses to help them with pricing, determining breakeven points, controlling costs, and budgeting.

Government accounting. Government accounting is simply accounting that’s done for government entities. Government accountants are concerned with maintaining government regulations as well as learning a different way of keeping books.

Nonprofit accounting. Nonprofit accounting is unique to nonprofit organizations in that they often need to track and mark specific donations, manage grants and meet reporting requirements, fulfill public disclosures and reporting, and maintain a fund accounting process.

Financial accounting. Financial accounting is the preparation of financial reports for external use and includes providing financial statements.

Attest. Attest accounting is where a CPA goes through a process of verifying financial reports of a business to interested third-parties, such as banks and the public. The three main services in this area include compilations, reviews, and audits. Only a CPA can perform these services.

Fraud or forensic accounting. A specialty role in accounting, forensic accountants can help a company that has been the victim of fraud. There are also services available to help reduce the possibility of fraud.

Tax accounting. Tax accounting can be many things: the preparation of federal and state income tax returns for businesses, individuals, and other entities like estates and trusts; state and local tax assistance with collection, filing, remittance, and compliance; franchise tax support; and payroll tax collection, filing, and payment. There are more, but these are the big ones.

Budgeting. Making a revenue and spending plan is an important accounting function and every business needs a plan, a road map.

Internal auditing. Large companies have internal audit departments that maintain checks and balances for the company. In small companies, having someone in charge of monitoring internal controls would be the equivalent function.

Accounting systems. Some accountants are technology-savvy, and this type of accountant can help solve technology issues, integrate accounting system modules, and streamline workflow.

Fiduciary accounting. A fiduciary is someone legally responsible for financial responsibilities in an organization. Fiduciary accounting typically refers to accounting for trusts, but can have a much broader meaning.

Public accounting. Public accounting is practiced by employees in a public accounting firm, which is one that serves many businesses with varying accounting needs.  This is opposed to private or industry accounting where an accountant goes to work for one company in their accounting department. Public vs. industry accounting is really referring to an accountant’s career experience.

Managerial accounting. This type of accounting focuses on internal numbers and how the organization can reach its goals. It’s broader than cost accounting, but there is an overlap. Accountants who serve in an advisory capacity to businesses will focus on this area.

Did we get all of the terms you might be wondering about? If not, ask us, and we’ll add it here.

While “fetching” might be what some trained dogs can do, accounting systems are getting into the act too. This relatively new feature is called “receipt fetching,” and it’s when an app can retrieve documents directly from the vendors that you do business with so you don’t have to spend so much time on paperwork retrieval. 

Apps that can perform receipt fetching can integrate with your accounts and pull invoices into their system.  For example, if your business has an account with a utility or telecom company, the receipt fetching app can pull the electricity, water, or telephone bills into your receipt fetching app account and consolidate them. 

The benefits are simple. You save time, certainly. But the bigger benefit is you no longer have a monthly deadline to get your documents to your accountant  —  at least for all the documents that can be automated in this way.  This reduces stress and eliminates minutiae from your day.

Accountants benefit too.  No accountant likes to spend their time asking clients for documents over and over again.  We know you have better things to do with your time, and we know you probably hate doing the paperwork.  Receipt fetching is an easy way to get the job done.

To take advantage of receipt fetching, the first step is to select a receipt-fetching app. A few of the apps to select from include LedgerDocs, ReceiptBank, HubDoc, and Greenback. Some of these apps do receipt fetching only, and others have many more functions.

The second step is to detemine which vendor accounts are supported, and to connect with them. Generally speaking, the connection is based on your account credentials, so if those change, the connection will need to be updated. When many of your documents can be pulled into one place, you don’t have to spend time logging into each vendor portal to pull receipts. 

If you’re curious about how to benefit from receipt fetching in your business, please feel free to reach out.