- Jul 26, 2023
- 1 min read

Cost of goods sold: How to calculate and record COGS

Updated: Jan 26

There can be differences in physical inventory counts and adjusting journal entries for FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory valuation methods. The choice between FIFO and LIFO affects how the cost of goods sold (COGS) and ending inventory are calculated, and adjustments may be necessary based on physical inventory counts. Let's look Cost of goods sold: How to calculate and record COGS.

Let's consider a scenario where the physical inventory count reveals discrepancies, and adjustments are needed:

FIFO (First-In, First-Out): Ending Inventory-Beginning Inventory + Purchases = COGS

Original Entry:
Debit: Cost of Goods Sold (COGS)
Credit: Inventory
Physical Count FIFO
- Adjustment Entry for Overstated COGS:
Debit: Inventory
Credit: Cost of Goods Sold (COGS)
- Adjustment Entry for Understated COGS:
Debit: Cost of Goods Sold (COGS)
Credit: Inventory

LIFO (Last-In, First-Out): Beginning Inventory + Purchases - Ending Inventory = COGS

Original Entry:
Debit: Cost of Goods Sold (COGS)
Credit: Inventory
Physical Count LIFO
- Adjustment Entry for Overstated COGS:
Debit: Cost of Goods Sold (COGS)
Credit: Inventory
- Adjustment Entry for Understated COGS:
Debit: Inventory
Credit: Cost of Goods Sold (COGS)

In both cases, the adjusting entries aim to align the recorded value of the inventory and COGS with the actual physical counts, ensuring that the financial statements accurately reflect the company's current inventory position and cost of goods sold. Always consult with your accountant or follow your company's accounting policies when making adjustments to financial records.