How do I calculate inventory and cost of goods sold?

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Expert Bookkeeping Services · Accepted Answer

Cost of goods sold reflects inventory sold during the period, not simply every stock purchase paid for. Accurate opening stock, purchases, adjustments and closing inventory are essential for a reliable gross margin. Use consistent stock records Maintain quantities and a supportable costing method, and include appropriate freight or other landed costs. Check returned goods, damaged stock and items held by third-party warehouses. A purchase creates inventory until the related goods are sold under ordinary accrual accounting, so coding every supplier payment to expense can distort monthly profit. Reconcile counts and margins Compare the inventory system with the ledger and conduct physical counts appropriate to your volume and risk. Investigate shrinkage, negative quantities and unexpected margin changes. Obsolete goods may need a write-down. Have your accountant confirm the applicable reporting and tax basis, especially where local small-business rules allow a different approach or the business manufactures products.

How do I calculate inventory and cost of goods sold?

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Detailed answer

Use consistent stock records

Reconcile counts and margins

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