Inventory and Cost of Sales

In accounting, there is a close relationship between Inventory and Cost of Sales, as these two accounts are interrelated and interact continuously in the course of business operations. The Inventory account represents the physical stock in financial terms, providing a monetary representation of the goods a business holds for resale. Typically, inventory is valued at the cost at which it was purchased from the supplier.

The Cost of Sales account (also known as the Cost of Goods Sold account) is a nominal account that records the cost incurred by the business when goods are delivered to a customer as part of a sale or when a customer takes the goods from the business premises as a result of a sale. One of the most fundamental relationships between the Inventory account and the Cost of Sales account is that the Inventory account is “credited” when goods are sold and leave the business, while the Cost of Sales account is “debited” to reflect this cost. Similar to Cash, Inventory is a “real” account—when inventory decreases, it is credited, and when it increases, it is debited