Accrued Accounts for COGS: Understanding the Connection Between Cost of Goods Sold and Inventory

In the world of accounting, there are several schedules that businesses use to track their finances. Two important schedules are Accrued Accounts Payable and Cost of Goods Sold (COGS). While these schedules may seem unrelated at first glance, they are actually connected in a crucial way.

Revenue does not impact either of these schedules, as it is reflected in Accounts Receivable. Instead, COGS is directly related to the inventory that a company has purchased but has not yet sold. When a product is sold to a customer, the company removes the purchase from the Inventory account and records it as COGS. This reduces the Accounts Payable balance and results in the loss of $1,000 in cash.

However, when the bill for the inventory is due, the company pays the supplier in cash. This payment is recorded as a liability in Accounts Payable, demonstrating the accrual basis of accounting. According to this principle, businesses must record transactions when they are earned or incurred, regardless of when the cash changes hands.

Notably, a company typically records a purchase of inventory when both the inventory is received and a legal obligation to pay for the goods has been established. This means that the company records a purchase of inventory when the goods are received, creating a connection between COGS and Inventory.

To illustrate this relationship, let's consider a financial model. When a company purchases inventory, it increases its Accounts Payable balance and reduces its cash balance. However, once the inventory is sold, the company decreases its Inventory account and increases its COGS expense. This has a direct impact on the company's profit margin, as the cost of goods sold affects the bottom line.

In conclusion, Accrued Accounts for COGS are an essential part of a company's financial reporting. By understanding how these schedules interact with each other, businesses can gain valuable insights into their profitability and make informed decisions about their operations.

Accrued accounts for cogs