Navigation:  APPENDIX > Accounting Notes > INCOME STATEMENT > COST OF GOODS SOLD > Cost of Goods Purchased >

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The cost of goods sold section of the Income Statement calculates the value of the merchandise that has been consumed (or that has disappeared) for the month in question.

 

The Cost of Goods is generally not the total of the cost value of all the items found on the sales report for the month, although under normal circumstances, it should be close.

 

The Goods Available for Sale is the amount of merchandise you would theoretically have at the end of the month if there had been no sales, plus the freight charges for the month. In words, the Goods Available for Sale is:

 

(+)Opening Inventory(previous month’s closing inventory)

plus(+)Cost of Goods Purchased(purchases this month)

plus(+)Freight of Incoming goods(freight on purchases this month)

minus(—)Returns to Vendor This Period

minus(—)Vendor Discounts This Period(discounts actually taken this month — discounts marked as taken on a payment to a vendor)

 

equals(=)Goods Available for Sale

 

The Cost of Goods Sold is the difference between the Goods Available for Sale and the Closing Merchandise. I.e., the value of the goods you would have had were there no sales or other disappearances, and the actual value of the remaining merchandise.

 

Purchases are calculated by adding up the invoices payable in the system received (not paid for) in the current month which were assigned to expense codes starting with the digit 5. In Version 8 and beyond, any hand-checks expensed to 5-series codes are included in the purchases totals. (Hand checks are those which were not specifically applied against invoices-payable in the Jewelry Shopkeeper.)

 

Example. Started a month with $5000 worth of inventory. Purchase one $700 necklace. Return one watch for $150. Sell one $300 ring. You would expect to have a closing inventory of $5,250. In this example, the sales report would show the sale of one item for a total cost value of $300, which is very close to the Cost of Goods Sold Calculated on the income statement. See the table below:

 

 

 

Opening Inventory

5,000

Purchases

700

Freight

15

Returns

150

Discounts

0

Goods Available for Sale

5,565

Closing Merchandise

5,250

Cost of Goods Sold

315

 

 

 

 

 

If adjustments had been made to the inventory this month, and the closing merchandise were 5,125, this would not affect the Goods Available for Sale, but it would affect the Cost of Goods Sold:

 

 

Opening Inventory

5,000

Purchases

700

Freight

15

Returns

150

Discounts

0

Goods Available for Sale

5,565

Closing Merchandise

5,125

Cost of Goods Sold

440

 

 

 

 

If somehow, the opening inventory were in the system with the wrong number, such as $3,000, but the closing merchandise is correct, that would affect the Goods Available for Sale and the Cost of Goods Sold:

 

 

Opening Inventory

3,000

Purchases

700

Freight

15

Returns

150

Discounts

0

Goods Available for Sale

3,565

Closing Merchandise

5,250

Cost of Goods Sold

-1,685

 

 

 

 

If you added $1,100 more merchandise by adjusting inventory quantities or by choosing Enter Existing Inventory, the closing merchandise would be higher, but the income statement would not know how it got higher because it didn’t see the purchases in the invoices payable file. i.e. the inventory level magically went higher so your cost of goods is magically lower.

 

 

Opening Inventory

5,000

Purchases

700

Freight

15

Returns

150

Discounts

0

Goods Available for Sale

5,565

Closing Merchandise

6,250

Cost of Goods Sold

-685