What is the difference between Inventory Asset and Cost of Goods Sold?

Inventory and cost of goods sold (COGS) are both related to a company's products/merchandise, but they have different meanings.

Inventory refers to the goods and materials that a company has on hand and are available for sale. It is the raw materials, ingredients, product packaging, work-in-progress, and finished goods that a company has in stock at a given point in time. This also includes shipping costs of raw materials in to you (freight in) to make your product. Think of Inventory Asset as anything you buy that goes into the creation of the final, physical product — and if you make more of your product, that cost will increase.

There are four types of spending are typically categorized under Inventory Asset:

1. Raw material
2. Production cost (rent, labour, etc.) or payment to co-packers
3. Packaging
4. Freight-in

Cost of goods sold (COGS), on the other hand, is the cost associated with the goods that a company has sold during a specific period of time. By its definition, COGS typically will always go in pair with Sales of goods. If you sell a product, there’s an associated cost of goods sold to be booked; otherwise none.

In summary, inventory represents the items a company has available for sale, while COGS represents the cost of the items that have been sold. Inventory is considered an asset and is reported on the balance sheet, while COGS is reported as an expense on the income statement.

In accrual-based accounting, Inventory Asset is capitalized on the balance sheet as an asset and expensed as COGS when you sell a product.

Since Pocket is an accrual-basis platform, any time you purchase raw materials, you should book this cost to Inventory Asset. This is key to understanding the difference between Inventory and COGS.

In the past have you been booking these these purchases directly to COGS? Well, that may have been right if your previous accounting books were cash-basis, but not in accrual-basis books!

At MyPocketCFO, we're committed to helping you find that balance.