COGS represents the direct costs of producing or purchasing the goods your business sells. It includes raw materials, direct labour and manufacturing overhead but not selling or administrative expenses.
Cost of Goods Sold is a critical line item on your profit and loss statement because it directly determines your gross profit. COGS includes all costs directly attributable to producing your products or delivering your services: raw materials, direct labour costs, manufacturing overhead, freight-in and any other costs directly tied to production. For retailers, COGS is simply the purchase cost of inventory sold. For service businesses, COGS (sometimes called Cost of Sales) includes direct labour and materials used to deliver services. COGS does not include indirect costs like rent, marketing, administration or management salaries - these are operating expenses. The calculation is: Opening Inventory + Purchases - Closing Inventory = COGS. Accurately tracking COGS is essential because it determines your gross profit margin, which is a key indicator of pricing effectiveness and operational efficiency. SortBooks helps track COGS by correctly categorising purchase transactions and separating direct costs from overhead expenses in Xero.
SortBooks helps with the bookkeeping behind cost of goods sold (cogs) by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing cost of goods sold (cogs) by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Gross profit is your revenue minus the cost of goods sold (COGS). It shows how much money remains from sales after covering direct production or purchasing costs.
Inventory refers to the goods your business holds for sale or uses in production. It is a current asset on the balance sheet and its cost flows to COGS when sold.
The P&L (also called the income statement) shows your business revenue, expenses and resulting profit or loss over a specific period.
Gross margin is your gross profit expressed as a percentage of revenue. It shows what percentage of each sales dollar remains after covering direct costs.
Operating expenses are the day-to-day costs of running your business, excluding COGS. They include rent, wages, utilities, marketing, insurance and administrative costs.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.