There are many types of expenses on the income statement and many of them carry the name “expense” at the end. Cost of Goods Sold doesn’t have the term expense at the end. This causes many people to wonder, “Is cost of goods sold an expense?” The answer is a resounding YES. Cost of goods sold (COGS) is one of the most common expenses out there.
Why the Confusion?
Apart from not having the term “expenses” attached to it, COGS is also separated from the other expenses. Business owners and investors find it useful to separate COGS so that they can see the gross profit before all other expenses.
Example
Let’s pretend you are an accountant at your local Wal-Mart. Your Wal-Mart purchases $5,000 worth of water bottles. At the point of purchase, your journal entry would look like this:
Inventory (Water Bottles) $5,000
Cash $5,000
Notice that at this point, there is still no COGS expense.
Now, let’s pretend that in one day your Wal-Mart sells all $5,000 worth of inventory for $10,000. The journal entry would look like this and a COGS expense would be incurred.
Cash $10,000
Sales Revenue $10,000
Cost of Goods Sold (an expense) $5,000
Inventory $5,000
The cost of goods sold expense is recognized when a sale is made. More than you wanted to know? I surely hope so.
