While there are many things to keep track of during accounting, one of the most essential records is COGS, the cost of goods sold. That is because it is one of the most significant expenses a business can have, and getting it wrong can give a company a false financial status that can lead to many consequences. Miscalculating COGS can also affect decisions revolving many aspects of a business, from advertisement budgeting to product pricing.
That being said, to get a precise COGS number, you will need to do three actions: record the volume of a product sold, trace the cost of each unit, and calculate the COGS.
1. Recording the amount of a product sold
One of the critical factors of COGS is how much of a product is sold. This allows you to figure out how much was spent in total. You will generally collect this data from the places you have reduced your inventory in some way. For example, if you have someone buying your products for sale, you need to record how much is being sold. If you have given some as a gift or a reward, or even for an influencer to review, you will need to record that too. That is because all of these mean that the product leaves your hand, and that's extra cost incurred to your business.
2. Recording the cost of each product
Many aspects go into the cost of producing a specific product, and it will all depend on how you got a hold of that product. For example, if you are buying the product from someone else to sell, then the amount you paid for it is the cost you are going to take note of. On the other hand, if you made the product yourself, you will need to consider different expenses such as labour, materials, and packaging.
3. Recording the cost of goods sold
Once you have all the data above, then you will be able to record COGS. However, you will need to record it correctly. In most cases, an incorrect recording of COGS is simply a matter of timing. Some businesses record their COGS as soon as they receive their inventory. This is a mistake, as the numbers will not make any sense.
Let’s say you purchased $10,000 worth of products for resale in January and recorded it immediately without making any sales. Your net income for that month would be -$10,000. The more accurate way of recording COGS is doing so when you sell an item. For instance, let’s say each of the products you bought cost you $1,000 to purchase, and you want to sell it at $1,500 each. Then, if you sold five the next month in February, your sales will be recorded at $7,500 while your cogs are at $5,000, while January's net income would remain at $0. This results in a net income of $2,500 for February, which will more accurately reflect your financial situation at month-end.
Conclusion
COGS might be a little complicated for inexperienced people to grasp a hold of first, but with time and sticking to the right methods, you will become an expert in calculating and recording the figure. That said, the most complicated part is figuring out the cost of your products, as many factors go into the manufacturing cost of it. Once you nail that, however, everything else will be a breeze. By correctly accounting and recording for COGS, you will be able to enjoy accurate profit margin numbers, make the right financial decisions, and grow your business!
The E-Commerce Accountant offers accounting help for online businesses and influencers looking to take control of their accounting needs. If you are looking for an e-commerce accountant in Gold Coast, contact us today!