The term cost of goods sold can mean a lot of different things, depending on what type of business you are in. If you are in a retail business, the definition is fairly clear cut. The cost of goods sold equals your purchase costs on the items you have sold during a given period. If you sold ten candles at $10 each, then your revenue from sales is $100. If those 10 candles cost you $4 a piece when you purchased them, then your cost of goods sold is $40 for those 10 candles.
However, you probably purchased those 10 candles several months before they were sold. Where do you record that $40 purchase initially? Your purchases of goods for sale should initially be debited to your inventory account, which is an asset account on your balance sheet. You have simply exchanged one asset (cash ) for another asset (inventory).
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