Is Cost of Goods Sold a Debit or Credit?
Cost of goods sold is a debit. It is an expense account, so it increases with a debit when inventory is sold and is credited only to correct it or at closing. Its normal balance is a debit, it is reported on the income statement, and on a business return it is computed on Form 1125-A.
- Account category
- Expense
- Normal balance
- Debit (Dr)
- Increases with
- Increase (Dr)
- Decreases with
- Decrease (Cr)
- Financial statement
- Income statement
| Debit (Dr) | Credit (Cr) |
|---|---|
| Increase (Dr) | Decrease (Cr) |
| Cost of units sold240,000.00 | Closed at year end240,000.00 |
Classifying one account is easy. Ledger IQ classifies the whole trial balance.
Try it freeCost of goods sold on a trial balance
| Acct # | Account | Debit | Credit |
|---|---|---|---|
| 1000 | Cash | 48,200.00 | |
| 1200 | Accounts receivable | 86,400.00 | |
| 1300 | Inventory | 72,500.00 | |
| 1500 | Equipment, net of depreciation | 82,000.00 | |
| 2000 | Accounts payable | 31,500.00 | |
| 2400 | Notes payable | 85,000.00 | |
| 3900 | Equity, beginning of year | 172,600.00 | |
| 4000 | Sales revenue | 550,000.00 | |
| 4100 | Sales returns and allowances | 12,000.00 | |
| 4200 | Interest income | 1,200.00 | |
| 5000 | Cost of goods sold (the account this page is about) | 240,000.00 | |
| 6000 | Salaries and wages | 96,000.00 | |
| 6050 | Officer compensation | 60,000.00 | |
| 6060 | Payroll taxes | 11,900.00 | |
| 6100 | Rent expense | 36,000.00 | |
| 6150 | Insurance expense | 14,400.00 | |
| 6200 | Utilities expense | 9,600.00 | |
| 6250 | Advertising expense | 7,200.00 | |
| 6275 | Meals | 4,800.00 | |
| 6300 | Depreciation expense | 19,000.00 | |
| 6350 | Amortization expense | 4,000.00 | |
| 6400 | Bad debt expense | 3,500.00 | |
| 6450 | Interest expense | 6,800.00 | |
| 6900 | Other operating expenses | 26,000.00 | |
| Total | 840,300.00 | 840,300.00 |
Example journal entries
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 24,000.00 | |
| Inventory | 24,000.00 |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 240,000.00 | |
| Purchases | 232,000.00 | |
| Inventory | 8,000.00 |
Why it works that way
Expenses reduce equity, and reductions in equity are debits. Cost of goods sold is an expense, so it carries a debit balance like every other expense account.
Its character is different from the rest of the income statement, though. Most expenses are recorded when incurred. Cost of goods sold is recorded when the related sale happens, because it exists to match the cost of a product against the revenue from selling it. That matching is why a business can buy $300,000 of goods in a year and report $240,000 of cost of goods sold with nothing wrong.
Form 1125-A is a computation, not a single account
On all three business returns, cost of goods sold on page 1 comes from Form 1125-A, which works through:
Beginning inventory, plus purchases, plus cost of labor, plus additional section 263A costs, plus other costs, less ending inventory.
That means several trial balance accounts feed one line, and two of them are balance sheet accounts. The practical consequences:
- Ending inventory on Form 1125-A and inventory on Schedule L must be the same number
- Beginning inventory must equal last year's ending inventory, or the prior return and this one disagree
- Cost of labor on 1125-A is production labor only, and it cannot also sit in salaries and wages on page 1
The double counting problem
Production wages are the usual casualty. A manufacturer's payroll includes factory staff whose labor belongs in cost of goods sold, and office staff whose pay belongs in salaries and wages. If the whole payroll is deducted on page 1 and the factory portion is also reported as cost of labor, the deduction is taken twice.
The same applies to freight in, which belongs in the cost of goods computation rather than in a separate shipping expense account, and to depreciation on production equipment where section 263A applies.
Service businesses
A business with no inventory generally has no cost of goods sold, though many bookkeeping systems create the account anyway and some service firms use it for direct costs. That presentation is not fatal, but it is worth knowing which it is before completing Form 1125-A, because the form asks inventory questions that a service business cannot answer sensibly.
Where it fits in the accounting equation
Tax return treatment
| Form | Line |
|---|---|
| Form 1120 | Page 1 line 2, computed on Form 1125-A |
| Form 1120S | Page 1 line 2, computed on Form 1125-A |
| Form 1065 | Page 1 line 2, computed on Form 1125-A |
Common questions
Is cost of goods sold a debit or credit?
A debit. It is an expense account. The credit side of the entry is usually inventory, as the cost of the goods moves off the balance sheet when the sale is recorded.
How is cost of goods sold calculated for the return?
On Form 1125-A: beginning inventory plus purchases, cost of labor, additional section 263A costs and other costs, less ending inventory. Several trial balance accounts feed it, and the ending inventory figure has to match Schedule L.
Can production wages be in both cost of labor and salaries and wages?
No, and it is the most common double deduction on a manufacturing return. Factory labor belongs in the cost of goods computation; office and administrative pay belongs in salaries and wages on page 1. Reporting the same payroll in both places deducts it twice.
Does a service business have cost of goods sold?
Usually not, since there is no inventory. Some service firms use the account for direct costs, which is acceptable for book presentation, but Form 1125-A is built around inventory and is generally not the right place for it on the return.
Related answers
Go deeper
This page is the short answer. These articles work through the same ground in detail.
Last reviewed October 18, 2026.