A Guide for Asset Tracking

Fundamentally, the cost of goods sold formula relies on a basic accounting concept: what you had (opening inventory), plus what you got (purchases), less what remains (close inventory). This fundamental equation catches the flow of inventory through your business over a given accounting period.

The standard formula to calculate COGS can be expressed as:

COGS = Opening Inventory + Purchases – Closing Inventory

Let’s break down each component:

Opening Inventory: The entire value of inventory available for sale at the beginning of your accounting period.  This value often matches your previous accounting period’s closing inventory, ensuring financial continuity.

Purchases: This includes all inventory purchased during the accounting period, including manufacturer raw materials and retailer finished goods.  Shipping, customs duties, and handling fees should be added to the base purchase price to prepare items for sale.

Closing Inventory: This reflects the value of unsold inventory remaining at the end of your accounting period, determined through physical counting or perpetual inventory tracking systems.

To illustrate this costs of goods sold formula in action, consider a clothing retailer with these figures for the quarter:

• Opening inventory: $75,000
• Purchases during the quarter: $125,000
• Closing inventory (determined by physical count): $85,000

Applying the formula: COGS = $75,000 + $125,000 – $85,000 = $115,000

This calculation reveals that $115,000 worth of inventory was sold during the quarter, providing the foundation for gross profit calculations and further financial analysis.