In accounting, Cost of Goods Sold is an account used to track the costs associated with the manufacture of a product, including cost of raw materials, direct labor, packaging, and other direct costs. Cost of Goods Sold does not include general or overhead costs for the business, such as rent, insurance, and office support.
Cost of Goods Sold is an expense account. It has a normal debit balance. It increases on the debit side and decreases on the credit side.
In accounting software, Cost of Goods Sold has an account type called Cost of Goods Sold rather than an expense. This signifies to the software that this account will be used to calculate Gross Profit.
What is Gross Profit?
Gross Profit is the difference between Revenue and Cost of Goods Sold. It shows how much a company has to spend to make the products compared to the selling price of the product. For example, if an item sells for $10 and the cost of manufacturing that item is $7, the company has a gross profit of $3 [$10 – $7 = $3]
Gross Profit is carefully tracked and managed to measure how much profit in a business comes from making and selling a product. It is reported in a multi-step income statement in this format:
| Revenue | 10,000 | |
| Cost of Good Sold | 7,000 | |
| Gross Profit | 3,000 | |
| Expenses: | ||
| Rent Expense | 1,800 | |
| Insurance Expense | 500 | |
| Total Expenses | 2,300 | |
| Net Income | 700 |
