Understanding COGS and Its Impact on Business Profitability

The cost of making the product is an expense to the business and reduces the profit that the company can make when selling the products. The COGS is calculation once a year by showing charges from the Start to the end of the company fiscal (financial) year.

In calculation the COGS you need to include cost of producing the product, wholesale price of good resold and what the direct manual labor cost the company makes the product. The other costs to be calculation is cost of containers, freight, rent, utilities, shipping and overhead. Whenever the COGS increase the net income is less. The sales of products need to be kept down to increase the profit. Inventory also determined the COGS by it changes of the product that was sold at the beginning of year and the inventory at the end of the previous year is calculation.

The cost of goods purchased and made during the year is added up and the inventory at the end of the year is subtracted. This calculation is done so the company will know how much the inventory cost and how much was sold by the company during the year. The inventory is reported at the cost to make or buy the product, it is not the cost to sell it. If sells items cost change during the year, the company much figure out a transaction to deal with those cost changes in a way suitable to the IRS. It would have to figure this change into their COGS equation.

Order custom essay Understanding COGS and Its Impact on Business Profitability with free plagiarism report

450+ experts on 30 subjects Starting from 3 hours delivery

Get Essay Help

The IRS has quite a few standard ways to account for changes in cost through the year without having to track each product price separately. 2. Record the transactions HTH made the purchase and sale of merchandise. All sales transactions have a credit entry to the sales account. The other transactions depend on the particular situation that is surrounding that transaction. There are make ways a company can makes sales and it can have a impact on an transactions sales. The sales can be for cash, resulting in a debit to cash or credit, which can lead to a debit to account receivable.

The companies that use the cash method receive sales only when actual cash have been received. When using the accrual method record the sales the moment the sale is made regardless of payment. In a permanent inventory system every entry for a sale must have a matching entry cost of goods. Using this system you have to book a cost of goods transaction for every individual inventory item you sell. The periodic systems from beginning to end on cost of goods entries are recorded during the accounting period, resulting in single -entry sales transaction.

Once a business chosen an counting system that method dictates that part of the entry all the time. In a cash system you cannot ever record a sale transaction until the money has been paid. A cash or credit transaction may be different because it depends on the actual sales. Also there are risks when using cash sales and credit sales. When using the cash sales you get paid right then there is no waiting to receive your money in cash or credit card. With credit sales the company extend credit with agreement of to be paid later and the business run the risk that the customer may not pay the money on time or pay not at all.

It is very important when using the cash or credit system for a transaction the company needs to keep a record Of it (document) so the detail can be found of the transaction. The detail should include sales receipt with date, description of what was sold and the amount of the item. But credits sales are (not credit card sales) are treated just like a cash sales. The source document is done on a invoice slip it include all the information as the sale receipts and much more it have the purchaser name, contact information, credit terms due date, account number, purchase order number and invoice number.

These record much be kept straight this should be done by premiered sale receipts and invoices slips and must be use in order, this will make it easier when you have to use then for information which you will need now and later. When using the accrual method accounting recording system should always be put in a second Journal entry for the cash part at the time of the receipt and this accounting method only let you know when you count the revenue not how you got it.

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

Check my essay Hire Writer