Implementing COGS in GnuCash for a small business

[Robert Locke]

In general the accounting should follow these basic principles:

Assets = Liabilities + Owners Equity

Delta Owners Equity = Income - Expense

You maintain an Asset/Inventory account for the Raw Materials that you
have obtained to produce your product. As you "use" those Raw Materials,
you decrease that Asset and apply it to the Expense account called COGS.

So, the four basic transaction types are as follows:

1) Receive raw materials for resale:
Liability: Accounts Payable: ($100)
Assets: Inventory: Raw Materials: $100

2) Pay vendor for raw materials:
Assets: Checking Account: ($100)
Liability: Accounts Payable: $100

Of course, you can combine 1 & 2 if you pay and receive in one step:
Assets: Checking Account: ($100)
Assets: Inventory: Raw Materials: $100

3) Deliver/bill final product:
Assets: Accounts Receivable: $200
Income: Product Sales: ($200)
Assets: Inventory: Raw Materials: ($100)
Expense: COGS: $100

4) Receive Payment from customer:
Assets: Accounts Receivable: ($200)
Assets: Checking Account: $200

Of course, you can combine 3 & 4 if you receive payment and deliver in
one step:
Assets: Checking Account: $200
Income: Product Sales: ($200)
Assets: Inventory: Raw Materials: ($100)
Expense: COGS: $100

Hope that helps,

--Rob