In accounting, Cost of Merchandise Sold is an account used to track the costs associated with the purchase of products for resale in a merchandising or retail business. Cost of Merchandise Sold does not include general or overhead costs for the business, such as rent, insurance, and office support.
Cost of Merchandise 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 Merchandise 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 Merchandise Sold. It shows how much a company has to spend to purchase the products compared to the selling price of the product. For example, if an item sells for $10 and the cost of purchasing 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 purchasing and selling a product. It is reported in a multi-step income statement in this format:
| Revenue | 10,000 | |
| Cost of Merchandise Sold | 7,000 | |
| Gross Profit | 3,000 | |
| Expenses: | ||
| Rent Expense | 1,800 | |
| Insurance Expense | 500 | |
| Total Expenses | 2,300 | |
| Net Income | 700 |
