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Bookkeeping Glossary

What Is Cost of Goods Sold?

Cost of goods sold (COGS) is the direct cost of producing the goods or services you actually sold during a period — the materials, inventory, and direct labor that went into them.

The formula is Beginning Inventory + Purchases − Ending Inventory = COGS. It captures what you sold, not what you bought — a crucial difference. COGS sits right below revenue on your P&L, and revenue minus COGS is your gross profit.

Why it matters: COGS drives gross margin, the truest measure of whether your pricing and production are healthy. In thin-margin businesses like restaurants, a COGS percentage that drifts up two points can erase the entire profit — which is why it's tracked obsessively (see our restaurant bookkeeping guide).

The most common mistake: booking purchases as COGS without counting inventory. If you buy $10,000 of materials but only used $7,000, your true COGS is $7,000 — the other $3,000 is still an asset sitting on the shelf. Skipping the inventory count makes your margins look wrong every month you stock up or draw down.

Related terms
Gross MarginProfit & Loss StatementNet IncomeChart of AccountsFull glossary →

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Cost of Goods Sold FAQ

What is cost of goods sold (COGS)?
Cost of goods sold (COGS) is the direct cost of the products or services you actually sold in a period, calculated as Beginning Inventory + Purchases minus Ending Inventory. It's subtracted from revenue to get gross profit.
What's the difference between COGS and operating expenses?
COGS is the direct cost of what you sold (materials, inventory, direct labor). Operating expenses are the indirect costs of running the business (rent, marketing, administrative salaries). Revenue minus COGS is gross profit; subtracting operating expenses gets you to net income.

Part of the Tides Bookkeeping Glossary — and the complete guide to small business bookkeeping.