There is a lot of accounting lingo to learn when starting your own business, so in this post we’ll go over the term ‘cost of sales’, often known as ‘cost of goods sold’, or COGS for short.

“Cost of Sales” refers to what?

In accounting, the cost of sales—also known as the “cost of goods sold” (COGS)—is the price a company must pay to close a sale.

What kind of information should I provide to calculate my cost of sales?

The cost of a sale may include the amount spent on:

• Stock.
• Raw resources for manufacturing items.
• Builder’s materials.
• Subcontractors provide the fundamental service on offer.

You should include these in your COGS calculation even if you don’t pay for them at the same time you make the sale. It’s also worth knowing that many costs are ‘allowable’, which means you can claim them on your tax return to decrease the amount of tax you pay.

Check out: Typical Tax returns mistakes and how to prevent them

Why is the cost of sales important?

The money you spend on producing things or selling services to your consumers reduces the amount of profit you can make. Knowing how much you spend on each sale will help you determine how efficiently the firm performs and where it requires more attention. It’s also an important component in understanding gross profit.

Gross profit is the entire amount earned from sales minus the cost of making those sales.

Looking at gross profit as a percentage will assist you realize if your price is correct. For example, shops often have a 50% to 70% gross profit margin. If the profit margin is only about 20% then this can imply that the cost of sales is too high, or the retail price is too low, therefore it will offer you something to focus on and make improvements.

Read Also: Understanding Accounting Terms: Profit and Loss

It’s one of the many reasons why proper bookkeeping is so important. Categorizing the products you buy and sell allows you to see exactly where there are costs and where you’re generating money. It will assist you in more correctly calculating the cost of sales, allowing you to address issues with your gross profit margin.

If you are looking for an accountant to help you with your queries related to your business accounts, Call at 020 35765107 or send a message to book a free consultation. Learn more about our online accounting services and pricing.

Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.