Frequently Asked Questions

How do I use the cost of goods sold functionality?
Last Updated a year ago

Bookkeeping Pro edition supports the perpetual inventory system and can automatically calculate cost of goods sold at the point of sale. The program supports the average cost base method of calculating cost of goods sold. In simple terms this means that the program calculates the average cost of goods purchased and applies this to the goods sold. When goods are sold but have not been purchased the program does not apply cost of goods sold to the sale. Once the items have been purchased the cost of goods sold is applied to the sales that did not have cost of goods sold applied.

Bookkeeping Pro edition can alternatively use the periodic inventory system and average cost flow assumptions when calculating cost of goods sold in reports. The effects of various transactions on inventory and the various ledger accounts are best illustrated by an example. The following diagram shows pictorially how funds and inventory flow between the various ledger accounts at different stages in the process.

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This is an explanation by example of purchases and sales for merchandise and how and when things get posted to various ledger accounts.
Step 1 & 2. You purchase 100 units @ $30 each.
Quick Purchase:
Select the inventory item purchased. Unit Price $30. Quantity 100. Purchase Account: "Purchases" Pay From Bank Account: "Bank Account"

The following ledger entries are created:
Purchases (Asset) debit $3000 Accounts Payable (Liability) credit $3000 Accounts Payable (Liability) debit $3000 Bank Account (Asset) credit $3000

Step 3 & 4. You sell 50 units @ $50 each.
Quick Sale:

Select the inventory item purchased.
Unit Price $50
Quantity 50
Sale Account: "Sales"
Deposit in Bank Account: "Bank Account"

The following ledger entries are created:

Accounts Receivable (Asset) debit $2500
Sales (Revenue) credit $2500

Bank Account (Asset) debit $2500
Accounts Receivable (Asset) credit $2500

Step 5a & 5b. At the end of the accounting period you run the inventory turnover statement.

You then enter the following general journal entries:

Inventory Item Account (Asset) debit $1500
Purchases (Asset) credit $1500

Cost of Goods Sold (Expense) debit $1500
Purchases (Asset) credit $1500

The way to calculate the first general journal entry amount from the report is as follows:

Inventory Change = (Quantity Purchased - Quantity Sold)
Inventory Adjustment = Inventory Change * Purchase Price

The way to calculate the second general journal entry amount from the report is as follows:

Cost of Goods Sold = Quantity Sold * Purchase Price

The Inventory Turnover Statement will calculate the inventory adjustment and cost of goods sold values automatically and display them on the report. The end of the accounting period can be whatever you like. It can be the end of the day, week, month, year, or anything else you choose.
The resulting ledger account balances will be:

Purchases (Asset) $0
Accounts Payable (Liability) $0
Accounts Receivable (Asset) $0
Bank Account (Asset) credit $500
Sales (Revenue) credit $2500
Cost of Goods Sold (Expense) debit $1500
Inventory Item Account (Asset) debit $1500

The net profit shown on the income statement would be $1000, being $2500 revenue less $1500 cost of goods sold.

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