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Why cost of goods sold account is debited with inventory sold.

Quality Products Co. just sold and shipped $1,000 worth of goods using the terms FOB Shipping Point. With its cost of goods at 80% of sales value, Quality makes the following entries in its general ledger

  1. Account Receivable A/c Dr 1000
    to sales a/c Cr 1000

  2. Cost of goods sold ac Dr 800
    to inventory Cr 800

Sir can you please explain me why inventory has been credited and not cash ?

asked Aug 7, 2015 in Journal Entries by hussain (38 points) 1,861 views

1 Answer

0 votes
Dear Hussain,  The first entry signifies that a credit sales of $1000 has been made.  Since the cost of the sales of $1000 is $800, the second entry transfers $800 from inventory (stock) to Cost of Goods Sold.  In the above question actually Inventory A/c is equivalent to Purchase A/c.  Hence those goods which have been sold are transferred from Inventory A/c to Cost of Goods Sold.  If we buy the inventory by paying cash then journal entry is:

Purchase A/c or Inventory A/c    Dr.

   To Cash A/c

To calculate profit, we have to subtract COGS and not inventory from Sales.  This is why cost of the INVENTORY sold is transferred to COGS A/c.  The balance remaining in Inventory A/c is closing stock with the business.
answered Aug 8, 2015 by jbsclasses (3,971 points)
Thank you for helping sir
It is my pleasure, you are always welcome.