# Difference Between Purchases And Cost Of Goods Sold

The term Cost of Goods sold and purchases are mainly used in trading account, and i guess you must have been thinking about the difference between purchases and cost of goods sold (COGS). The difference between them are stated below.

Purchases are goods purchased by the company and are recorded at cost which represents the cost of that particular good or service purchased only while Cost of Goods sold represents the cost of the goods you sold which includes material cost, labour cost and overheads incurred in bringing that product to a condition that it can be sold.
I will be illustrating the above definition with 2 examples below:
You bought wood from the market at a cost of \$100, that will be your purchase and will be recorded at \$100 in your books. Your plans are to us the wood to make a chair therefore you hire a guy for it on \$10 per hour. The guy took 24 hours to make the chair which is 24 hours multiplied by \$10 equals \$240. Now ignore overheads here because allocation of overheads is an entire different topic. Lets keep things simple and say overheads cost is \$150 which represents all other expenses directly related to the manufacturing of that chair.
Now, you sold the chair for \$500, remember your purchase was \$100 wood but your cost of goods sold in this case would be as follows:
Material Cost = \$100
Labour Cost = \$240
Cost of Goods sold (100+240+150) = \$490
Sale Price = \$500
The Second illustration
A business started on 1st Jan 2009 , purchased inventory costing \$100,000 during the year. But at the year end inventory costing \$20,000 is still unsold. What will be the Cost Of Goods Sold?