What Is Cost Of Sales
Cost of sales (COS) are your costs involved in directly producing the goods or services that you sell. It’s important that you track the costs to make sure that you are always profitable.
To look at your COS is dependent on whether your business sells goods or services. This guide, originally produced by Starling Bank, goes through both types. You will also learn the formulas for calculating cost of sales for both goods, products and services.
Cost of sales for goods and products
If you buy in goods to sell and don’t hold any stock, also known as inventory, then this is fairly straightforward. The formula is sales income – cost of goods sold = Gross Profit.
When you buy in more goods than you sell, it may look as though you have made a loss and have no tax to pay. but there’s a further adjustment to make in your accounts to reflect that you still own some of the items.
In this example, I buy in 500 items for £3 each and sell 250 for £5 each. At the end of Day One I have 250 items left. Each item is valued at £3 as stock is nearly always valued at cost.
That means I paid £1,500 for the 500 items, and sold half those items for £1,250. But I still have 250 items in stock. So not quite as simple as when I sold all the stock.
Cost of sales formula for goods and products
COS = cost of items sold = opening stock + purchases – closing stock =
Period 1 Number of Items Sale/Purchase Price Total Value
Sales 250 Items Sold £5 £1,250
Purchases 500 New Stock Brought In £3 £1,500
Minus unsold stock 500-250=250 Unsold Items Are Not COS £3 £750
