Cost of Goods Sold Journal Entry Example

Simple version: ABC International has a beginning balance in its inventory asset account of
$500,000. It buys $450,000 of materials from suppliers during the month. At month-end, it
counts its ending inventory and determines that there is $200,000 of inventory on hand. The cost
of goods sold journal entry is:
Debit
Cost of goods sold expense

Credit

750,000

Purchases

450,000

Inventory

300,000

This entry matches the ending balance in the inventory account to the costed actual ending
inventory, while eliminating the $450,000 balance in the purchases account.
Advanced version: ABC International has a beginning balance in its inventory asset account of
$1,000,000. It buys $350,000 of materials from suppliers during the month, which it records in
the inventory account. At month-end, it counts its ending inventory and determines that there is
$475,000 of inventory on hand. In addition, ABC incurs $150,000 of overhead costs, which it
records in an overhead cost pool asset account. There are now two cost of goods sold journal
entries, of which the first is:
Debit
Cost of goods sold expense

Credit

875,000

Purchases

350,000

Inventory

525,000

The first entry was similar to the transaction noted earlier in the simple version, where we
eliminated the balance in the purchases account and altered the ending inventory balance to
match the costed amount of ending inventory.
In addition, there is $150,000 of overhead to allocate to the items produced during the month. An
analysis of produced items reveals that 1/3 were sold and 2/3 retained in inventory. Thus, the cost
allocation is:
Debit

Credit

Inventory

100,000
Cost of goods sold

Overhead cost pool

50,000
150,000