Cost of goods sold: How to calculate and record COGS

Priscilla Wolfe
Jul 26, 2023
3 min read

Updated: Jan 28

Follow Consistent Accounting Procedures:

Accounting in QuickBooks follows a specific and structured process. As an accrual-based system that complies with GAAP standards, following consistent accounting procedures is imperative. Proper setup of products and services, including standard sales and purchase prices, is essential for calculating COGS when no bill is linked to an invoice. The primary goal of GAAP accounting is to align expenses and bills with the revenue generated from invoices, creating a clear audit trail to connect all transactions seamlessly and produce accurate financial statements.

The accounting process is:

Estimate (optional) to PO (optional) to Bill Item or Expense Item (marked billable, attach receipt) to bank feed (transaction) matched to bill or expense, will populate the Unbilled Charges Report, adding Inventory (quantity) and COGS (amount) to your financial statements. When invoiced (add billable items to the invoice from the suggested transaction pop out drawer). This process Bill + Invoice is critical for correct accounting of Sales, COGS and Inventory, is GAAP Compliant and produces accurate financial statements.

My accounting preference is to GAAP accounting (matching purchase with revenue to calculate accurate Gross Profit) following correct workflows.

If you are pre-entering vendor or store receipts that will be billable to a client, use a bill, then match in the bank feed (bank transactions) These bills will remain on A/P until paid, from a bank feed transaction or otherwise.

Pre-entered bills will dictate whether the expense/purchase is for:

Item dropdown lines for products and services purchased for resale, typically billable items sold and matched to an invoice. OR
Category dropdown lines for indirect overhead expenses, asset purchases, liability payments, and are typically non-billable. You can enter a bill or expense for COGS directly to the Income Statement, using the category field, for cash accounting transactions only <not recommended, especially where inventory is concerned, and valuations are necessary.
Always add, customer or job, class and location to each document

The rule of COGS calculations: Cost of goods sold: How to calculate and record COGS
- An invoice (income) + bill attachment (Item: COGS) with markup = gross profit.
- An invoice (income) + bill attachment (Item: COGS) and no markup is a reimbursement = zero gross profit.
- An invoice with no bill or expense attachment will not calculate COGS (if not stated in your products and services), increasing your stated gross profit-income, and your tax liability.
- An Invoice with only a receipt attachment may not calculate the true COGS, or COGS at all, to your income statement (from the receipt) if the price and cost are pulling from the products and services and no billable expense item is attached. Increasing gross profit income and your tax liability.
- Sales, Inventory and COGS should be reconciled EOM.
- Create a (BOM) monthly and save to My Accountant > Shared Documents, maintaining a historical record of Inventory, COGS and Sales.