1. Cost of Sales (also referred as Cost of Goods Sold) is generally refers to the direct costs attributable to the production of goods and services sold by the business.
2. Cost of Sales forms the second line of the Profit and Loss statement. By substracting the Cost of Sales from Revenue, the business can determine the Gross Profit for a given time period (monthly/quarterly/annually).
3. Depending on the nature of your business, there are different ways to calculate Cost of Sales. In here, we will introduce two commonly used methods depending on the nature of your business – Sales of Goods and Sale of Services.
4. If your business is selling of goods, the Cost of Sales is calculated by adding the Opening Inventory to Goods Acquired for the period and less the Closing Inventory. You also need to include other Direct Costs such as Direct Labor, Freight and Other Direct Overheads.
5. For Sale of services business, there is no Inventory or Goods involved. Therefore, the Cost of Sales is calculated by adding all the Direct Costs incurred in delivery of the service. Examples of such Direct Costs are Direct Labor, Transportation, Material and Tools.
6. As you can see, you need to distinguish whether your business is in selling of goods or services when calculating the Cost of Sales in order to arrive at the correct Gross Profit figure the accounts.
7. Recognizing your business Cost of Sales correctly is important. This expenses are generally tax deductible and can reduce your business taxable income. So you can pay less income tax.
9. If you have any questions regarding your business Cost of Sales, please come and talk to us. PL Biz Consulting Pte Ltd have the knowledge and experience to explain and guide you to recording your business Cost of Sales in a correct and accurate manner.
