Expenses & Purchases - costs of sale
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I'm not having a good day am I, first the post about capital etc and now I'm having trouble with this!
Gross profit = sales - cost of sales
Cost of sales is determined as any costs incurred to produce a product.
Expenses are costs which you incurr whether producing the product or not.
Therefore, expenses are going to be things like rent and utilities, stationary, postage, advertising, recruitment, telephones, advertising depreciation of fixed assets too.
Costs of sale should therefore be purchases of raw materials, salaries of employees, national insurance, admin charges etc.
What I can't get my head round is how exactly I should post these things (I know all this comes up in ECR, but not got that far!), like advertising - it is required to make sales so maybe it should go under cost of sales not expenses?
Can anyone help me determine how to do this? If we receive an invoice for advertising, DR Advertising and CR Creditors - but is the advertising account an expense or purchase/cost of sale???
Or is it just posted as an expense and then when the costing methods are done, it is adjusted then or something?
AAAAARRRRRGGGGHHHH!!!
Gross profit = sales - cost of sales
Cost of sales is determined as any costs incurred to produce a product.
Expenses are costs which you incurr whether producing the product or not.
Therefore, expenses are going to be things like rent and utilities, stationary, postage, advertising, recruitment, telephones, advertising depreciation of fixed assets too.
Costs of sale should therefore be purchases of raw materials, salaries of employees, national insurance, admin charges etc.
What I can't get my head round is how exactly I should post these things (I know all this comes up in ECR, but not got that far!), like advertising - it is required to make sales so maybe it should go under cost of sales not expenses?
Can anyone help me determine how to do this? If we receive an invoice for advertising, DR Advertising and CR Creditors - but is the advertising account an expense or purchase/cost of sale???
Or is it just posted as an expense and then when the costing methods are done, it is adjusted then or something?
AAAAARRRRRGGGGHHHH!!!
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Comments
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Re:Expenses & Purchases - costs of sale
I think you're making more of this than needs be. For FRA cost of sales is determined as:
Opening Stock
+ Purchases
+ Carriage In
- Purchase Returns
- Closing Stock
= Cost of Sales
If you consider the working out of CoS that we do in FRA is the trading account. We're basically only dealing with buying and selling stuff. All expenses apart from those above are treated as overheads and thus go in the expenses section of the P&L.
A manufacturing company will have a 'manufacturing account' instead of the trading account where non-overhead costs would be posted. Maufacturing accounts don't form part of the current intermediate syllabus (much to the chagrin of my tutor who taught us them anyway as she reckoned they were useful to know).
Hope that helps
Chris
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Re:Expenses & Purchases - costs of sale
I think that's half my problem, I think about it all too much! LOL!
But I want to understand it for work really!0