Cost of goods sold calculator ESTIMATE

The inventory identity

What you started with, plus what you added, minus what is still on the shelf, is what left in the period. With $1,000 starting inventory, $4,000 of purchases, $500 of direct labor, $200 of materials, $100 of other costs, and $1,500 left at the end, goods available are $5,800 and cost of goods sold is $4,300. IRS Publication 334 describes this layout on Schedule C for a sole proprietor who figures cost of goods sold: beginning inventory, purchases, labor, materials and supplies, other costs, then ending inventory.

Goods available = Beginning + Purchases + Labor + Materials + Other
COGS = Goods available − Ending inventory

What belongs in the count

Inventory is property you hold to sell to customers in the ordinary course of the business. It is not the laptop you use to run the shop — that is a depreciable asset, which is a different calculation on the straight-line or MACRS pages. Personal withdrawals of goods come out of purchases so you do not deduct your own consumption. A service business with no goods to sell often has no COGS at all. Labor that is truly overhead, such as a bookkeeper, is an operating expense, not cost of goods sold.

Tie it to the books

The ending count becomes next period’s beginning count. If those two disagree, the month-end close is not finished. Gross profit on the profit and loss is revenue minus this cost. A year-end physical count belongs on the year-end checklist.

General information, not tax or legal advice. Who must keep inventory, and which costs have to be capitalized, are tax-method questions. Publication 334 is the starting IRS text for Schedule C filers.

Sources

• IRS Publication 334 — Tax Guide for Small Business, including how cost of goods sold is figured on Schedule C.

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