Cost of Goods Sold (COGS) GL Impact
If you use both the Accounting and Inventory features, you must know the cost of each item in inventory to track the total value of your assets and to calculate profits. You can use NetSuite to track the costs associated with goods and services you sell, or Cost of Goods Sold (COGS). The cost of an item you buy or sell affects accounts in your general ledger.
A COGS account is not an expense account, but it functions like an expense account. When calculating your company's gross profit, the COGS total is subtracted from the income total before expenses. While the cost of an item can be directly associated with income, expenses (such as rent and utilities) are normally considered overhead and are not directly associated with the sale of an item.
For example, you buy calculators from a vendor to sell in your retail store. Each time you buy a calculator and add it to inventory, you need to account for two changes:
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increase of assets on hand
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increase of payments you need to make
The amount that posts to your ledger for these changes is the value, or cost of the item. If the vendor charges $10 for each calculator, these changes are recorded when you receive a calculator into inventory:
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$10 increase in Inventory Asset account
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$10 increase in Accounts Payable account
Each time you sell a calculator you must account for two changes:
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decrease of assets on hand
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increase of costs you incurred to make this sale
When you fulfill the item, the item cost posts to your ledger to record the appropriate changes:
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$10 decrease in Inventory Asset account
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$10 increase in COGS account
In this way, you keep track of the value of your inventory on hand and you also track the total amount of money spent on inventory that you have sold.
The cost of an item is determined at the time you receive it into inventory through a purchase or an inventory adjustment. Item cost is determined by the price of the item that shows on the purchase order.
The exact cost assigned to an item depends on the costing method you choose. Standard costing methods are First In First Out (FIFO), Last In First Out (LIFO), or Average.
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First-In, First-Out (FIFO) – Using FIFO, the first goods purchased are assumed to be the first goods sold so that the ending inventory consists of the most recently purchased goods.
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Last-In, First-Out (LIFO) – Using LIFO, the last goods purchased are assumed to be the first goods sold so that the ending inventory consists of the first goods purchased.
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Average costing (moving average method) – In NetSuite, this is the default costing method. COGS are calculated as the total units available during a period divided by the beginning inventory cost plus the cost of additions to inventory.