A cost of goods sold amount that reflects the cost of the product or good that a company sells to generate revenue, which appears on the income statement as an expense. Also called “cost of goods sold”. It is essentially a cost of doing business, such as the amount you pay to purchase raw materials in order to turn them into finished products. For example, if it costs $6 to produce a $10 widget, your cost of goods sold is $6 per widget. That is, the cost of goods sold equals the beginning inventory plus the cost of goods purchased during a certain period minus the ending inventory. However, the meaning of cost of goods sold differs from one company to another. There are three types of companies: merchandising, manufacturing, and services. Merchandising companies, such as retail stores and wholesalers, sell goods that usually have the same physical form as what the company buys them for. Therefore, the acquisition cost would be the cost of goods sold in the merchandising company. The acquisition cost includes not only the cost of purchasing the goods, but also the cost necessary to make the goods ready for sale, such as shipping costs. Let's think about the following situation during the period. In addition to the beginning inventory, a company purchased additional merchandise so that the quantity of goods available for sale became the beginning inventory plus the additional purchased merchandise. At the end of the period, the company wants to determine the amount of cost of goods sold and ending inventory. How do they determine the amount of cost of goods sold and ending inventory? There are two types of approaches: periodic inventory method and perpetual inventory method. The periodic inventory method is as follows. (Cost of Goods Sold) = (Goods Available for Sale) – (Ending Inventory) In the periodic inventory method, we determine the quantity of ending inventory at the end of the period, and then subtract the ending inventory inventory from the goods available for sale . On the other hand, the perpetual inventory method is as follows. (Ending Inventory) = (Goods Available for Sale) - (Cost of Goods Sold) In the perpetual inventory method, we determine the cost of goods sold amount, then subtract the cost of goods sold from the goods available for sale. Therefore, we must constantly keep a record of the inventory. While recordkeeping is burdensome for some businesses, it has important benefits.