In one sentenceThe cost of the items actually sold during the period; it is deducted from net sales to arrive at gross profit.
Simply put
It is not calculated on everything you bought, only on what you sold. What remains on the shelves stays as inventory (an asset) until it is sold.
Under the periodic inventory system it is calculated as: opening inventory + purchases − closing inventory. Under the perpetual inventory system it is recorded with every sales invoice.
Worked example
A spare parts store started the year with inventory of 80,000 SAR, purchased 300,000 SAR during it, and its inventory at year-end was 100,000 SAR.
Opening inventory80,000 SAR
+ Purchases300,000 SAR
− Closing inventory100,000 SAR
Cost of goods sold = 80,000 + 300,000 − 100,000280,000 SAR
Formula: Opening inventory + Net purchases − Closing inventory
Don't confuse it with
Operating expensesAdministrative salaries, rent and marketing are not part of cost of goods sold for a trading business; they appear after gross profit.