The calculation of the Cost of Goods Sold (COGS) figure in Zoho Books depends on the inventory management system you have in place.

There are two common methods: periodic inventory process and perpetual inventory process.

1.PERIODIC INVENTORY PROCESS

In this process, bookkeepers post purchase invoices to either the Cost of Goods Sold or the inventory asset account on the balance sheet on a daily basis. At the end of each month or a specific reporting period, a manual stock reconciliation is performed to determine the actual value of the stock on hand at that reporting date. This valuation is then used to post an adjustment to reflect the true values of the Stock Asset and Cost of Goods Sold.

If the bills were initially posted to the Cost of Goods Sold account, the adjustment would involve decreasing (aka ‘Crediting”) the amounts posted and increasing the Stock Asset account to reflect the value of unsold goods by the reporting date. Conversely, if the relevant bills were posted to the Stock Asset Account, the adjustment would involve the opposite, reducing the Asset Value and increasing the Cost of Goods Sold Account to reflect the goods sold within the month.

It is important to note that the adjustments described above can sometimes have the opposite of the increase or decrease effect once you involve opening and closing balances from previous periods. The general idea is that the adjustment needs to reflect the true value of the stock held at the reporting date, and the actually Cost of the Goods Sold in the reporting period.

2. PERPETUAL INVENTORY PROCESS –

This process still aims to provide an accurate Cost of Goods sold and Stock Asset figure for a given period/reporting date. However, in a perpetual accounting system, such as Zoho Books & Zoho Inventory, the bills for stock purchases are always posted to the Inventory Asset/ Stock Asset Account throughout the period. The amounts are then moved from the Inventory Asset / Stock Asset account on a perpetual basis to the relevant Cost of Goods Sold account as the goods are actually sold (i.e. when you raise sales invoices with the relevant items assigned in Zoho Books).

Here’s an example of the double-entry transactions that occur in Zoho Books when you create a bill with full inventory tracking:

1.Purchase of Inventory Items:

• Inventory Asset Account is debited (increases)
• Accounts Payable is credited (increases)

2.Payment of the Bill:

• Accounts Payable is debited (decreases)
• Bank/Cash Account is credited (decreases)

3.Cost of Goods Sold (COGS) Adjustment:

• COGS Account is debited (increases)
• Inventory Asset Account is credited (decreases)

It’s important to note that the COGS adjustment is triggered when a sales invoice is raised in Zoho Books to reflect the actual sale of goods. The system uses the First In First Out (FIFO) method of inventory tracking to determine the cost per unit when applying the Cost of Goods Sold adjustment. You can find more information here: https://www.zoho.com/ae/books/help/items/reports-for-items.html

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