A key aspect of business accounting is cost of goods sold. This formula makes this calculation simple to understand: Beginning Inventory + Inventory Purchases - End Inventory = Cost of Goods Sold.
Calculate the business' beginning inventory. Determine the inventory amount at the beginning of the month. This amount is also the ending balance for the previous month. For example, the beginning balance of $500 for Feb. 1 is usually the same $500 ending balance for Jan. 31.
Total the amount of inventory purchased throughout the month. If your business bought $100, $200, $350 and $250 in consecutive weeks, the total inventory purchased for the month would be $900.
Add the beginning inventory to the amount of inventory purchased in the month. Using the $500 from Step 1 and the $900 from Step 2, the sum would be $1,400.
Determine the ending inventory balance for the month. The ending inventory is the value of the inventory left at the end of the month after all sales have been recorded. If you end the month with $350 in inventory, this would be your ending inventory balance.
Subtract the ending inventory from the sum of the beginning inventory and inventory purchased during the month. In the example, subtract the $350 ending inventory balance from the $1,400. The balance, $1,050, is the cost of goods sold.
Your beginning and ending inventory might not always match, depending on the inventory method used. For example, if you do not deduct inventory until it is received by the purchaser, and you make a sale on the last day of the month but the purchaser does not receive it until the first of the next month, the ending and beginning balances are going to differ by the amount of the last purchase.
The equation used here is a simplified method of calculating cost of goods sold and works best with either a periodic or perpetual inventory tracking method. Periodic inventory tracking consists of taking inventory throughout the month, while perpetual tracking means conducting a daily inventory count.
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