Cost of sales, also called cost of goods sold (COGS), is the direct cost of producing or buying the goods and services a business actually sold during a period. It is deducted from revenue near the top of the income statement, and the result is gross profit.
What it means
Cost of sales captures only the costs tied directly to what was sold - the purchase or production cost of the inventory that left the business - not general overheads like rent or admin. As inventory is sold, its carrying cost transfers from the balance sheet into cost of sales, matching the expense to the revenue earned.
Where it fits in
In a service or manufacturing business, the wages of staff directly delivering the product can form part of cost of sales rather than general expenses. So a portion of payroll cost can appear here, directly reducing gross profit, while support and admin salaries sit lower down as operating expenses.
Key rules
- The direct cost of goods or services sold in the period.
- Deducted from revenue to give gross profit.
- Excludes general overheads and admin costs.
- Direct production labour can form part of it.
