Glossary · Also called Cost of goods sold
Cost of sales
The cost to the business of the goods it actually sold during the period.
What it means
Opening inventory plus purchases less closing inventory (with carriage inwards where relevant); the direct cost of goods sold.
Example
Revenue minus cost of sales gives gross profit.
Why it matters
It is central to the income statement and to calculating gross profit and margins.
In practice
Cost of sales is worked out in the trading section of the income statement and subtracted from revenue to give gross profit. The standard working is opening inventory plus purchases (adjusted for carriage inwards and returns) minus closing inventory.
Suppose opening inventory is RM5,000, purchases are RM20,000 and closing inventory is RM4,000. Cost of sales is RM21,000. This is not the same as the RM20,000 spent on purchases. It also releases last year's stock into the period and holds back this year's unsold stock.
Students often confuse cost of sales with purchases. Purchases is what was bought during the year. Cost of sales adjusts that figure for the inventory at each end, so it covers only what was actually sold. Only the cost of goods bought for resale belongs here. Running costs such as wages, rent and insurance are expenses lower down the statement.
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Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.5 Valuation of inventory (page 15).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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