Opening stock + purchases + direct expenses – closing stock = cost of goods sold
While calculating the cost of goods sold, we add direct expenses to opening stock and purchases. Direct expenses consist of expenses incurred in acquiring and manufacturing goods.
Opening stock: It should include stock of goods only.
Purchases: Purchases should include purchases of goods only. Purchases should not include purchases of assets. Goods withdrawn by the proprietor for his personal use should be deducted from the purchases. Subsidies and duty drawbacks are deducted from purchases.
Direct Expenses: Direct expenses are the expenses which are incurred for procuring the goods and bringing the goods to his place of business.