Glossary · Inventory and costing
Cost of goods sold (COGS)
Cost of goods sold is the direct cost of the products a business sold in a period: what it paid for the goods, or for the materials and labour to make them. It is subtracted from sales to give gross profit. It does not include overhead such as rent, marketing or office salaries.
Glossary / Cost of goods sold · Also called Cost of sales, Cost of revenue
How it works
COGS only counts goods that were sold. Stock still on the shelf is an asset, inventory, on the balance sheet. When an item sells, its cost moves from inventory to COGS. That is why buying a lot of stock does not by itself reduce profit.
A simple way to check the figure for a period is: opening inventory, plus purchases, minus closing inventory, equals COGS. Businesses that track inventory item by item get the figure automatically as each sale is posted.
Service businesses may have a cost of sales too, such as subcontractor costs on client work, but many simply report expenses.
Worked example: A quarter at a gift shop
A gift shop's inventory figures for the quarter:
| Amount | |
|---|---|
| Opening inventory | $12,000 |
| Plus purchases | $18,000 |
| Minus closing inventory | −$10,000 |
| Cost of goods sold | $20,000 |
| Sales | $50,000 |
| Gross profit | $30,000 |
In the US and in Canada
In the United States
Businesses with inventory report COGS on their tax return, such as Part III of Schedule C for sole proprietors. Small businesses meeting the gross receipts test have simpler inventory options.
In Canada
Sole proprietors report cost of goods sold on Form T2125, with opening and closing inventory.
In AcboBooks
In AcboBooks, each invoice or sales receipt for an inventory item takes it out of stock at its average cost and posts cost of goods sold, so the profit and loss shows gross profit without a month-end entry.
Related terms
Related on this site
Sources
- IRS Publication 334, Tax Guide for Small Business
- CRA guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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