What is "cost of goods sold," and why does my CPA keep asking?

When your CPA asks about your cost of goods sold, they're getting at one of the most important numbers in your business, and one a lot of owners have never actually calculated.

The what. Cost of goods sold, usually shortened to COGS, is what it directly costs you to produce or acquire the thing you sell. For a product business, that's the materials and the inventory. For someone who buys and resells, it's what you paid for the goods. It does not include your general overhead, rent, your phone bill, marketing. Those are operating expenses, a separate category. COGS is specifically the cost tied to the products that left the door.

The why, and this is the part that changes how you see the business. Your revenue minus your COGS gives you gross profit, which is the real money left over from selling your product before overhead. It's the difference between "I sold $10,000 this month" and "I kept $4,000 of it." Those are wildly different businesses, and only the second number tells you whether the thing you sell is actually profitable. If COGS is creeping up, or if it's higher than you assumed, you might be busy and growing and quietly losing money on every sale. That's the "sales are up but I have less money" trap, and it usually lives right here.

The how. Tracking COGS well means knowing what you paid for inventory and matching it to what you sold, not just what you bought. Buying $5,000 of materials in a month you only sold $2,000 worth doesn't mean $5,000 of COGS, the rest is still inventory sitting on your shelf, which is an asset, not an expense yet. Getting this right is where a lot of DIY books go sideways, because the timing is easy to mishandle.

The when: this matters most when you're pricing, and at year-end. If you've never seen your gross profit clearly, that's the number to look at before you set prices or decide whether a product line is worth keeping.

We can set your books up so COGS and gross profit are always visible, not something you reconstruct once a year and hope is close.

Related reading: What are quarterly estimated taxes, and do I actually have to pay them? · Why photographing your receipts matters more than you think

True North Co · Bookkeeping for small businesses · Hugo, MN

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