Amy has a master's degree in secondary education and has taught math at a public charter high school.
In this lesson, you'll learn more about cost of goods sold and how to properly write down your cost of goods sold and then transfer it into the right job order entry so your financial records are accurate.
What Is Cost of Goods Sold?
Owning a business requires a lot of paperwork. You need paperwork to order your supplies. You need paperwork to make your products. You also need paperwork to record all of your purchases and sales. One of these necessary records contains information on your cost of goods sold. This is a record that shows you how much you spent on the products you sold.
For example, say you are in the business of making and selling computers. You sold 500 computers last month. Your cost of goods sold for last month would be the amount you had to pay to make those 500 computers. So if it costs you $200 to make each computer, then your cost of goods sold for last month is 500 * $200 = $100,000.
Your accounting journal entry would look like this:
Cost of Goods Sold
What you've done here is debit your cost of goods sold account, while crediting your inventory account. Remember, in accounting, to debit is to add and credit is to take away for expense accounts. This increases the amount you've listed in your cost of goods account, while decreasing the amount you have in inventory. Why would you credit the inventory account? You credit the account because when you sell your products, you are subtracting from your inventory account and thus credit, or taking away from, this account.
Job Order Cost Flow
In addition to your cost of goods sold record, you can also keep track of your expenses and sales through the job order cost flow method. This method lists the cost of goods sold as part of a job, and it's usually used when you get orders that are unique to each customer.
In your computer business, you may have some people purchasing your already-made computers while other people request a custom built computer. For the custom built computer orders, you can use the job order cost flow method to track your accounting for these jobs.
For example, say you receive a custom order for a 3 GHz computer with 8GB of RAM, one Blu-ray player, and one DVD-RW player. You charge the customer $799 for this computer, and it costs you $210 to make it. In your journal, you will note everything related to this job, from the material acquisition to the sale of the item.
Over 79,000 lessons in all major subjects
Get access risk-free for 30 days,
just create an account.
The main difference between these two methods is that the job order cost flow method requires more entries in your journal and is more detailed. It also requires you to write these entries for each order that you receive.
If you need to move amounts from any account to another, all you have to do is to debit one account and credit the other. When you debit one account, you add money to that account, and when you credit an account, you take money away from that account.
So in the following journal entry, you can see that money is moved from the inventory account to the cost of goods sold account.
Cost of Goods Sold
Let's review. Your cost of goods sold record shows you how much you spent on the products you sold. To calculate this amount, you multiply the number of products you sold by the cost it took to make or purchase these products. Your journal entry has you debiting the cost of goods sold account and crediting your inventory account.
Another way to record your sales information is with the job order cost flow method. This method lists the cost of goods sold as part of a job. It records each individual inventory piece for each order. You'll have as many journal entries as needed to record the job, from raw materials to receipt of cash. This method gives you much more detail than simply recording your cost of goods sold in a given period of time.
To transfer amounts from one account to another, you simply debit one account and credit the other. For example, to move $210 from inventory to cost of goods sold, you'll write this in your journal:
Did you know… We have over 200 college
courses that prepare you to earn
credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the
first two years of college and save thousands off your degree. Anyone can earn
credit-by-exam regardless of age or education level.