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How does a sale of goods affect accounting?

A sale of goods will result in a journal entry to record the amount of the sale and the cash or accounts receivable. A second journal entry reduces the account Inventory and increases the account Cost of Goods Sold. Confused?

Is cost of goods sold a gross profit?

Cost of goods sold is likely the largest expense reported on the income statement. When the cost of goods sold is subtracted from sales, the remainder is the company’s gross profit. It is critical that the items in inventory get sold relatively quickly at a price larger than its cost.

What is the difference between inventory and cost of goods sold?

Inventory is recorded and reported on a company’s balance sheet at its cost. When an inventory item is sold, the item’s cost is removed from inventory and the cost is reported on the company’s income statement as the cost of goods sold. Cost of goods sold is likely the largest expense reported on the income statement.

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