Accounting explained
Cost of Goods Sold: Meaning, Format and Example
Cost of goods sold (COGS) is what the goods you actually sold cost you. It is not the same as what you bought in the period, because some of what you bought is still on the shelf and some of what you sold was bought last year.
The formula
Cost of goods sold = opening stock + purchases (and direct costs of bringing goods in) − closing stock.
| Sri Lakshmi Stores, 2025-26 | ₹ |
|---|---|
| Opening stock on 1 April 2025 | 2,70,000 |
| Add: purchases during the year (before GST) | 38,20,000 |
| Goods available for sale | 40,90,000 |
| Less: closing stock on 31 March 2026 | (3,30,000) |
| Cost of goods sold | 37,60,000 |
What goes in, what stays out
| Include in COGS | Keep out of COGS |
|---|---|
| Purchase price of goods for resale | GST you can claim as input credit |
| Freight and cartage to bring goods in | Shop rent, salaries, electricity |
| Non-recoverable taxes on purchases | Delivery costs to customers |
| Less: purchase returns and trade discounts | Depreciation of shop fixtures |
If you are not registered for GST, or the credit is blocked, the GST you pay is part of the cost of the goods.
Why closing stock matters so much
Every rupee of closing stock reduces COGS by a rupee and increases profit by a rupee. If Sri Lakshmi Stores had counted its closing stock carelessly at ₹3,00,000 instead of ₹3,30,000, COGS would be ₹37,90,000 and gross profit ₹10,10,000 instead of ₹10,40,000. Overstating stock does the opposite. That is why the 31 March stock count, and the price at which stock is valued, deserve care.
COGS for one item
The same logic works for one product. The store had 100 pouches of sunflower oil at the start of a month, bought 300 more, and had 100 left at the end, so it sold 300. Their cost depends on which purchase price you assign to the pouches sold, which is the question of inventory valuation, covered on its own page.
Common mistakes
- Treating purchases as COGS and ignoring the stock change
- Including recoverable GST in purchase cost
- Forgetting goods taken home by the owner, which should be removed from purchases as drawings
- Not counting stock at year end and carrying last year's figure
- Valuing closing stock at MRP instead of cost
COGS and GST registration
For a registered business claiming input credit, purchases in COGS are before GST, as in the example. For an unregistered shop, or for purchases where credit is blocked, the full amount including GST is the cost. If a shop registers part way through the year, its purchases before registration carry GST as cost, and those after carry it as input credit. Rules allow credit on certain stock held on the date of registration; ask a chartered accountant how that applies to you.
Key terms on this page
- Opening stock: stock on hand at the start of the period, at cost
- Closing stock: stock counted at the end of the period, at the lower of cost and NRV
- Carriage inward: freight paid to bring purchases in, part of their cost
- Purchase returns: goods sent back to suppliers, deducted from purchases
About the worked example
The examples on our accounting pages follow one shop through one year: Sri Lakshmi Stores, a kirana in Mysuru owned by Ramesh, for the financial year 2025-26. It sold ₹48 lakh of goods (before GST), made a gross profit of ₹10.4 lakh and a net profit of ₹4.7 lakh, and ended the year with a balance sheet total of ₹7.95 lakh. The figures are illustrative but they add up across every page, so you can follow one transaction from the journal to the balance sheet.
How TripleBill handles it
TripleBill tracks stock quantity for every item and values stock at quantity × the item's current purchase price. Its item and category P&L reports use that price as cost (not FIFO) and say so. For year-end accounts, give your accountant the counted closing stock.
General information on bookkeeping, not accounting or tax advice. For your final accounts and filings, consult a chartered accountant.
Last reviewed
Last reviewed: November 2026.
- Reference: ICAI Accounting Standard (AS) 2, Valuation of Inventories
Frequently asked questions
What is the formula for cost of goods sold?
Opening stock + purchases + direct costs − closing stock.
Is COGS an expense?
Yes. It is the main expense of a trading business and is deducted from sales to get gross profit.
Does COGS include GST?
Not if you claim the GST as input credit. If you cannot claim it, it is part of the cost.
Does COGS include shop rent?
No. Rent is an operating expense, deducted after gross profit.
What is the difference between purchases and COGS?
Purchases are what you bought in the period; COGS is the cost of what you sold, after adjusting for stock at the start and end.
Why is my gross profit too high one year and too low the next?
Often a wrong closing stock count. An overstated closing stock raises this year's profit and lowers next year's.
Is freight on purchases part of COGS?
Yes. Carriage inward, the cost of bringing goods to the shop, is part of their cost. Delivery to customers is a selling expense.
Do I need a stock count to know COGS?
For the year-end accounts, yes. Software stock figures are a good guide during the year, but a count catches theft, wastage and errors.
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