Ending inventory is subtracted from which total in the calculation of COGS?

Ending inventory is subtracted from the total of beginning inventory and total purchases to calculate the Cost of Goods Sold (COGS). The formula for COGS is as follows:

COGS = Beginning Inventory + Purchases - Ending Inventory.

By subtracting the ending inventory, we account for the unsold goods at the end of the accounting period, only including the cost of goods that have been sold during that period. This approach ensures that the expenses recognized (COGS) accurately reflect the cost of inventory that was actually transferred to sales, thereby providing a clearer picture of the profitability of the business.

In this context, beginning inventory refers to the inventory on hand at the start of the period, while total purchases are the additional inventory acquired during that period. Since COGS measures the cost of goods that have been sold, understanding how ending inventory reduces the total inventory available for sale is essential in determining true sales costs.