Costs of Goods Sold vs. Expenses

Understanding the difference between costs of goods sold and expenses can be a bit difficult at times.  To better understand what you are dealing with, cost of goods sold is anything that is directly related to the cost of manufacturing a product or purchasing a wholesale product to resell.  Let’s imagine that you are a reseller of toys.  If for example you purchase 100 board games at $10 each and also pay $25 to have them shipped to your store, both the cost of the board games and the shipping are costs of goods sold because it cost you $25 to get them to your store.  To better track your shipping in this case you would create a separate cost of goods sold account called shipping. But you don’t have to track shipping separately if you don’t want to.

If you are manufacturing products, the cost of goods sold would be items like payroll for employees directly involved in manufacturing and all materials that go into the actual product itself.  So you would have a payroll cost of goods sold account and various cost of goods sold accounts for the different materials used in the manufacturing process.  If you are in the construction industry, the cost of subcontractors would also be a cost of good sold.

On the other hand, in bookkeeping, expenses are for things not directly related to resale or manufactured items.  If you purchase a printer online for your office and pay shipping as well, both are expense items.  You don’t have to track the shipping expense of the printer separately if you don’t want to since it is directly related to the expense of acquiring the printer.

This is just a brief overview of the subject.  Consult with your tax accountant when you are in doubt.