Inventory and Cost of Goods Sold Journal Entry

In accounting, inventory and the cost of goods sold (COGS) are closely related. When goods are sold, their cost is transferred from the inventory account to the cost of goods sold account, reflecting the expense of the goods that were sold during the period.

Scenario:

A company sells goods worth ₹150,000 that originally cost ₹90,000.

1. Recording the Sale of Goods

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Accounts Receivable/Cash A/c	150,000
	To Sales Revenue A/c		150,000
	(Being goods sold on credit/cash)

Explanation:

1. Accounts Receivable/Cash A/c is debited to record the amount receivable or cash received from the sale.
2. Sales Revenue A/c is credited to recognize the revenue earned from the sale.

2. Recording the Cost of Goods Sold

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Cost of Goods Sold A/c	90,000
	To Inventory A/c		90,000
	(Being cost of goods sold recorded)

Explanation:

1. Cost of Goods Sold A/c is debited to reflect the expense of the goods that were sold.
2. Inventory A/c is credited to reduce the inventory by the cost of the goods sold.

Example with Opening and Closing Inventory

Scenario:

• Opening Inventory: ₹200,000
• Purchases during the period: ₹300,000
• Closing Inventory: ₹150,000

Calculating Cost of Goods Sold: $\text{Cost of Goods Sold} = \text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}$ $\text{Cost of Goods Sold} = ₹200,000 + ₹300,000 - ₹150,000 = ₹350,000$

3. Recording Opening Inventory

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Opening Inventory A/c	200,000
	To Inventory A/c		200,000
	(Being opening inventory recorded)

4. Recording Purchases

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Purchases A/c	300,000
	To Accounts Payable/Cash A/c		300,000
	(Being purchases recorded)

5. Recording Closing Inventory

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Inventory A/c	150,000
	To Closing Inventory A/c		150,000
	(Being closing inventory recorded)

6. Recording Cost of Goods Sold

Date	Particulars	Debit (₹)	Credit (₹)
2024-06-30	Cost of Goods Sold A/c	350,000
	To Opening Inventory A/c		200,000
	To Purchases A/c		300,000
	To Inventory A/c		150,000
	(Being cost of goods sold recorded)