This Video Mentioned SomeFormulas
| Beginning Inventory |
| + Net Purchases |
| – Ending Inventory |
| COGS |
| Beginning Inventory |
| + Net Purchases |
| – COGS |
| Ending Inventory |
| Beginning Inventory |
| + Net Purchases |
| Goods Available for Sale (Some professors care about this... some don't) |
Read Along With the VideoTranscript
I just wanna talk super quickly about inventory and cost of goods sold, just what these words actually mean. Inventory is an asset. Inventory is the thing that we're going to sell. Cost of goods sold is an expense. So the cost of goods sold is the amount that we spent to buy whatever it is we sold. So you could look at it this way. You could say inventory turns into cost of goods sold once we sell it. Now, wouldn't it make a lot more sense if they said goods and cost of goods sold, or even inventory and cost of inventory sold? Like, wouldn't it make sense to try to match these up a little bit?
That's all it is. Inventory is the assets that we're holding on to, to sell, and the cost of goods sold are those assets that we've already sold. So if we spent $1,000 buying some inventory, and then we sold it all, well, then our cost of goods sold is $1,000. That's why you're gonna see journal entries like this all the time: debit cost of goods sold, 1,000; credit inventory, 1,000.
Because the inventory becomes the cost of goods sold once it is sold. So this will be typically half of the journal entry that you're gonna see. If you sell the item for $2,000, you got $2,000 in cash, which matches up with your $2,000 in sales revenue. That's one half. That's the revenue side of the equation. But you sold the thing. The thing had to come from somewhere. So there's also the expense side of the equation, and that's what we looked at above. Cost of goods sold, 1,000; inventory, 1,000. Now, if you're sitting there wondering why do these things not match up?
Why are these numbers different? Well, the cost of goods sold is the amount you paid for it as the business, and the revenue is the amount that your customer paid you. If you were selling things at cost, you wouldn't stay in business very long. So this whole thing is one single sale. It's split up into the revenue side and the expense side.
We're gonna do a lot more about inventory, but I just wanted to make sure that right off the bat, you understand that cost of goods sold and inventory are best friends. They're totally linked.