Cost of Goods Sold vs Gross Revenue

Cost of goods sold and gross revenue is the main component of the company income statement. They are the main components present in the income statement.

Revenue less cost of goods sold is equal to the gross margin which is the number of sales that company remains after reducing COGS.

Cost of Goods Sold

Cost of goods sold is the cost that company acquires or produced the goods which already sold to the customer.

In the manufacturing company, cost of goods sold refers to the raw material, direct labor, and direct overhead necessary to produce the product. The direct materials are easily identified by just inspecting the product carefully. Direct labor refers to the workers who work directly in producing the goods. These are the cost that cannot be eliminated from production. They will move in the liner line compared with the production units. Other costs that is not necessary for producing the product will not include in the COGS.

These costs will be recorded as sub inventory accounts such as raw material, work in progress, and finished goods which is the current assets on the balance sheet. Only when they are sold to the customer, they will be reversed to the cost of goods sold.

For the trading company, the cost of goods sold will include the cost to acquire the product from the supplier. When the company purchase goods from supplier, all the cost will be recorded as inventory on the balance sheet. They will be reversed to the cost of goods sold only when the risk and reward are transferred to the customers.

The cost of goods sold can be calculated as follows:

Beginning Inventory

+ Net Purchase

– Ending Inventory

= Cost of Goods Sold

Cost of service is very similar to the cost of goods sold. It is the cost that company spends to perform service for the customers. We can say that it is the cost of goods sold for the service company. It is the cost that company spends to perform service for customers. They will not exist if the company does not perform the service. They will increase or decrease in accordance with the sale.

Gross Revenue

Gross revenue is the total sale that company makes within a certain period of time by excluding any deduction such as discount, return, and other allowance. It is the company’s ability to generate sales which is the main component to generate profit.

It is the gross amount that is not yet reflected in the cost of goods sold, operating expenses, and other costs. It is always presents in the first line on income statement.

Gross revenue also excludes the other items such as sale return, sale discount, and allowance. Sale return is the amount that needs to deduct back when the customers return goods due to broken, wrong products. A sale discount is the amount that we provide to the customer when settling the accounts receivable within a certain period. Allowance is the amount the company reduces for the customer when there is some problem with the shipment.

Gross revenue is the raw amount which not nets off with the items described above.