Cost of Goods Sold (COGS) is the purchase price of the goods you just sold. Your sales minus the COGS is your gross profit.
COGS is an important accounting information. Correct COGS gives you a clear picture of the profitability of your products.
Tip: To view the debit and credit accounting transactions for any sale or purchase invoice, enter the invoice number on General Ledger–Reports screen and click Continue button.
Let us make it clear with an example:
1. You purchase 10 iPhones for $400 each.
2. A customer comes in and purchases 2 of these at $500 each.
So your gross profit is $200.
MyLedger posts COGS automatically with each sale invoice. It calculates COGS on First-In First-Out (FIFO) basis. This means is that if you purchase 5 more iPhones at $430 each, MyLedger will keep calculating COGS @ $400 each until all 10 iPhones of first purchase transaction are depleted. Afterward it will calculate COGS @ $430.
MyLedger allows you to sell goods without purchasing these in advance. This is a common practice in many businesses where you have received the goods but do not have the vendor invoice.
This results in negative stock quantity on Goods & Services–Reports–All Items report. No COGS is posted for such transactions at the time of sale. Later when you record purchases, COGS is automatically recorded for these oversold items.
When you edit and repost an already posted sale invoice, COGS goes out of sync and incorrect accounting entries are posted. This causes incorrect income statement.
To confirm this, display your income statement and write down the COGS amount. Now open and repost any past sales invoice. Compare the new COGS in income statement with the old one.
Ideally you should never edit an invoice. Instead post a reversal of the invoice (using a credit invoice) and create a new invoice. Check the box Enforce transaction reversal for all dates on System–Audit Control screen.
If you do need to edit invoices, you can correct COGS transactions by running the re-posting of invoices through menu System–Repost COGS.