SMALL BUSINESS FINANCE 4: INCOME STATEMENT / COST OF GOODS SOLD

For a small business where products are not too numerous, it is easy to determine the Cost of Goods Sold.

For a small business where the volume is great, determining the Cost of Goods Sold is difficult. A useful accounting procedure is, as follows:

You have to define the period (i.e., Income Statement for the month, the quarter, the year).

At the end of the defined period, you have to arrive at some estimate of the raw materials used for the products you had at hand and ready for sale at the beginning of the defined period and those at the end of the period.

Your first cycle may not be too accurate, but a well-studied approximation will do. As you go through two or three cycles, you will arrive at a more accurate figure (especially, if you have been keeping good records).

To the beginning inventory figure, add all the purchases of raw materials you made during the period, then deduct the ending inventory figure. The result plus all the labor you used directly for production during the defined period will the Cost of Goods Sold.