What is cost of goods sold?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Cost of goods sold is the total direct cost of the goods or services a business sold in a period. For a retailer it is mostly the cost of stock sold. For a maker or service business it can also include materials, delivery charges on supplies and the wages of people producing the work.
For a business that holds stock, the figure comes from the stock records rather than from purchases alone: opening stock, plus stock bought during the period, minus closing stock, which a stocktake provides. Anything bought but still on the shelves at the end of the period has not been sold, so it stays out of cost of goods sold.
It is often called cost of sales. Where the line falls between a direct cost and an overhead is not always obvious, such as packaging or a delivery driver's wages, so it helps to agree the split with your accountant and keep it the same from period to period.
In Australia
business.gov.au defines cost of goods sold as the total direct costs of producing a good or delivering a service. It describes inventory as the goods and materials a business buys, makes or manufactures to sell or exchange, grouped into raw materials, work in progress and finished goods.
Its inventory guidance recommends doing a stocktake regularly, often monthly or quarterly. A stocktake is a physical count that shows whether the stock on hand matches the inventory records.
Worked example
| Item | Amount (AUD) |
|---|---|
| Opening stock | 12,000.00 |
| Add stock purchased | 26,500.00 |
| Stock available for sale | 38,500.00 |
| Less closing stock from the stocktake | 13,700.00 |
| Cost of goods sold | 24,800.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Treating every stock purchase as cost of goods sold, even when the stock is still unsold at the end of the period.
- Estimating closing stock instead of counting it, so missing, damaged or out-of-date items go unnoticed.
- Including general running costs, such as office rent, in cost of goods sold.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage your inventory
business.gov.au, Australian Government. Current at 16 October 2026, released 19 November 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.