Inventory and sales Updated November 2026

Cost of goods sold

Under a perpetual system, each sale is followed by an entry that debits Cost of Goods Sold and credits Inventory for the cost of the items sold. Under a periodic system there is no entry at sale; cost of goods sold is computed at period end as beginning inventory plus net purchases minus ending inventory.

Syntax

Perpetual: Dr Cost of Goods Sold / Cr Inventory (at cost); Periodic: COGS = Beginning inventory + Net purchases - Ending inventory

Part	What it is
`Cost of Goods Sold`	Expense on the income statement, deducted from net sales to give gross profit.
`Inventory`	Asset credited at cost when goods are sold (perpetual).
`Net purchases`	Purchases plus freight-in minus purchase returns and discounts (periodic).
`Inventory shrinkage`	Difference between the perpetual record and the physical count, written off to COGS.

Examples

Dr Accounts Receivable 1,500 / Cr Sales Revenue 1,500; Dr Cost of Goods Sold 900 / Cr Inventory 900

Result: Gross profit on the sale 600

Perpetual: goods costing 900 sold for 1,500.

Beginning inventory 10,000 + Purchases 50,000 - Ending inventory 12,000 = COGS 48,000

Result: Cost of goods sold 48,000 for the year

Periodic calculation from the year-end physical count.

Dr Cost of Goods Sold 350 / Cr Inventory 350

Result: Inventory reduced to the counted amount

Perpetual records show 12,350 but the physical count is 12,000: 350 of shrinkage.

Common mistakes

Crediting Inventory at the selling price: the cost entry always uses the cost of the goods, not the price charged to the customer.
Recording COGS at the time of purchase: goods bought are an asset until they are sold.
Forgetting to adjust for shrinkage under a perpetual system: the physical count still has to be reconciled to the records at least once a year.

Practice Cost of goods sold

These drills check your answer on live data, free, no account needed.

Sale on account with costMesa Electronics sells a home theater system to a customer on account for $3,200. The system cost Mesa $1,900. Mesa uses a perpetual inventory system. Record both the sale and the cost in one entry.
Inventory shrinkageTidewater Market uses a perpetual inventory system. At year end its records show an Inventory balance of $42,300, but a physical count finds only $41,650 of merchandise on hand. The company charges shrinkage to Cost of Goods Sold.

Questions

What is the formula for cost of goods sold?

Beginning inventory plus net purchases minus ending inventory. Under a perpetual system the same total builds up from the individual sale entries.

Is cost of goods sold a debit or credit?

Cost of Goods Sold is an expense with a debit normal balance. It is debited when goods are sold and credited when sold goods are returned to stock.

Inventory purchase (perpetual)How to record merchandise bought for resale under a perpetual system: Dr Inventory, Cr Accounts Payable, plus freight-in, purchase returns and periodic.
Cash saleHow to record a cash sale: debit Cash, credit Sales or Service Revenue. For merchandise under a perpetual system add Dr Cost of Goods Sold, Cr Inventory.
Sales returns and allowancesHow to record a customer return: Dr Sales Returns and Allowances, Cr Accounts Receivable or Cash, and Dr Inventory, Cr Cost of Goods Sold when restocked.
Inventory write-downHow to write inventory down when net realizable value falls below cost: Dr Cost of Goods Sold or Loss on Write-Down, Cr Inventory. Shrinkage included.