• Cost of Goods Sold = Value of the Goods Sold

The cost of goods sold is a term used to indicate the value of the goods sold.

This value is needed to identify the amount of basic/core (gross) profit made by the organisation

» Gross Profit = Sales − Cost of Goods Sold

» Illustrative Explanation

Consider the following data relating to an organisation.

Opening Stock at the beginning of the accounting period, Rs. 20,000.
Purchases of goods/stock during the accounting period : Rs. 2,48,000.
Direct expenses incurred :Rs. 54,000.
Unsold stock at the end of the accounting period valued at Rs. 36,000.
Value of Stock used for other purposes Rs. 14,000.

Particulars	Amount	Amount
Opening Stock (+) a) Purchases (Cost Value) b) Direct Expenses Total Value of Goods (−) a) Closing Stock (Value) b) Stock Unused for Trading Cost of Goods Sold	2,48,000 54,000 36,000 14,000	20,000 3,02,000 3,22,000 50,000 2,72,000

The formula for calculating the value of Cost of Goods Sold based on the above calculations can be written as

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses

− Closing Stock − Stock Unused for trading

• Stock Unused for Trading

Stock with the organisation may have been used for purposes other than trading. The value of such stock unused for trading purposes has to be deducted from the total value of stock so as to arrive at the value of cost of goods sold.

Some such instances

Goods being taken away by the proprietor for personal purposes;
Stock used in building up an asset;
Stock used for advertisement purposes;
Normal loss of stock;
Abnormal loss of stock;
Stock used up for other types of businesses (like consignments, branches, joint ventures etc)