Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It\u2019s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line labeled as \u2018cost of sales\u2019 or \u2018cost of goods sold\u2019. The naming really depends on the type of business and means used to earn revenue. Either its goods you are selling in which case the name is obviously \u2018cost of goods sold\u2019, or if its services, than you should replace the word \u2018goods\u2019 with \u2018services\u2019 and so on. But understandably not all expenses are put under \u2018cost of sales\u2019 although it may feel like appropriate. There are different types of expenses one incurs over course of business, but not all are \u2018cost of sales\u2019 obviously.
\n<\/p>\n
According to IFRS and most accounting standards expenses recognized as \u2018cost of sales\u2019 on the income statement are the ones that are directly attributable to sales. Generally speaking they are expenses a company has incurred to make a sale happen. And only those expenses, nothing else. When most classifications are easy to apply and understand, some create confusion and some are even forgotten.
\nAs a simple rule, ask yourself \u2018Had this expense incurred if I hadn\u2019t done the sale?\u2019 If the answer is \u2018no\u2019, it\u2019s attributable to sales and should be recognized under \u2018cost of sales\u2019. It\u2019s an easy method of splitting expenses between groups on the IFRS income statement. <\/p>\n
Expenses usually put under \u2018cost of sales\u2019 are of course the ones incurred to purchase goods to be sold, inventory and goods used in the production of finished products, but also transport charges to deliver goods to customer for an example. Depending on the type of business, some payroll expenses may also fall under \u2018cost of sales\u2019. <\/p>\n
What however sometimes is recognized as \u2018cost of sales\u2019, but shouldn\u2019t be so, is any discount given. Discount is always reducing revenue on the income statement. Yes, this expense hadn\u2019t occurred if you hadn\u2019t done the sale, but as a general rule under revenue you should recognize the fair amount of earnings received. Simply put, although the sales price for a new digital camera was originally 100 EUR, you gave a discount of 20 EUR, so this means that you actually received 80 EUR. On the income statement your \u2018net sales\u2019 totals 80 EUR (100 EUR revenue minus 20 EUR discount) and the \u2018cost of sales\u2019 is the cost price of this camera, which for this example is let\u2019s say 50 EUR. <\/p>\n
The accounting entries are as follows:
\nDebit:
\n \u2018cost of sales\u2019 \t\t50
\n \t\u2018discounts given\u2019 \t\t20
\n\t\u2018accounts receivable\u2019 \t80
\nCredit:
\n \u2018revenue\u2019 \t\t100
\n\t\u2018inventory\u2019\t\t50<\/p>\n
As you can see, you have charged the camera to expenses, decreased as a result your inventory, but also recognized a receivable balance and revenue on the income statement. Note that the line \u2018discounts given\u2019 or something similar is always under \u2018net sales\u2019 on the income statement. <\/p>\n
In summary, under \u2018cost of sales\u2019 you always recognize expenses that are directly attributable to sales. They need to relate to sales and reflect all the charges a company has made to make a sale happen. <\/p>\n","protected":false},"excerpt":{"rendered":"
Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It\u2019s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,40],"tags":[],"class_list":["post-1713","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-12-expenses"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1713","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=1713"}],"version-history":[{"count":4,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1713\/revisions"}],"predecessor-version":[{"id":2522,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1713\/revisions\/2522"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=1713"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=1713"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=1713"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}