Cost of Goods Sold (COGS)

COGS represents the direct costs of producing or purchasing the products you sell. It includes only the cost of inventory sold during a specific time period—not overhead, rent, or payroll.

Formula

COGS = Beginning Inventory + Purchases During the Period − Ending Inventory

Example:

Let’s say you started the year with $15,000 in inventory. You purchased $50,000 in new stock throughout the year. At the end of the year, your remaining inventory is $10,000.

COGS = $15,000 + $50,000 − $10,000 = $55,000

That means your cost of goods sold for the year is $55,000.

Why it matters

COGS directly affects your gross profit and helps you understand how much it costs to keep products on the shelf. Accurate COGS helps with pricing, inventory planning, and tax reporting.