Cost of goods sold (COGS) is the direct cost attributable to the products sold in a period — typically the purchase or production cost of that stock. Revenue minus COGS gives gross profit, the clearest measure of trading margin.
Accurate COGS depends on a sound stock valuation method such as FIFO or weighted average; without it, reported margins are only estimates.
Under the periodic approach most small Indian businesses use, COGS is computed as opening stock plus purchases and direct expenses, minus closing stock. If opening stock is ₹2,00,000, purchases ₹8,00,000, freight inward ₹50,000 and closing stock ₹2,50,000, COGS is ₹8,00,000; against sales of ₹10,00,000, gross profit is ₹2,00,000, a twenty per cent margin. Perpetual systems instead charge cost at the moment of each sale, so margin is visible invoice by invoice.
Boundaries matter. Freight and cartage inward, customs duty and other costs of bringing goods to saleable condition belong in COGS; freight outward, showroom rent and salesmen's salaries are operating expenses below the gross-profit line. For a GST-registered buyer, purchases are recorded net of the input tax credit claimed, so creditable GST never inflates cost — only blocked or ineligible credit becomes part of it.
The classic distortion is a closing-stock error, and it damages two years at once: overstate closing stock and this year's COGS falls while profit rises, then next year inherits the inflated opening figure and shows the opposite. Casual year-end stock counts, unrecorded wastage and goods lying with job-workers or in transit are the usual culprits, which is why auditors press hard on physical verification.