Financial Accounting · Statement of profit or loss and other comprehensive income

Cost of Sales, Inventory Adjustments and Other Expenses in ACCA

Updated 11 October 2026 · Fact-checked

Cost of sales is the cost of the goods you actually sold in the period. Calculate it as opening inventory plus purchases, plus carriage inwards, less purchase returns, less closing inventory. Then deduct other expenses, adjusted for accruals and prepayments, to reach profit. Carriage outwards is a distribution expense, not part of cost of sales.

Understand Cost of Sales, Inventory Adjustments and Other Expenses

Cost of sales is the cost of the goods that were sold during the period. It is not the same as purchases. You may have bought goods that are still on the shelf, and you may have sold goods bought last year. The inventory adjustment fixes this.

Start with opening inventory, the goods held at the start of the period. Add the purchases made during the period. Add costs of bringing goods to their present location, such as carriage inwards. Deduct purchase returns. This gives the cost of goods available for sale. Then deduct closing inventory, the goods still unsold at the end. What remains is cost of sales.

Closing inventory is valued at the lower of cost and net realisable value (IAS 2). Closing inventory in the statement of profit or loss becomes opening inventory next year. In the statement of financial position it is a current asset.

Other expenses follow the accruals concept. Include the expense for the period used, not the cash paid. An accrual is an expense used but not yet paid, so you add it to the expense and show a current liability. A prepayment is an amount paid for a future period, so you deduct it from the expense and show a current asset.

Carriage outwards (delivery to customers) is a selling and distribution expense. Discounts allowed to customers are normally treated as an expense, and discounts received from suppliers as income. Trade discounts are different. They are deducted from the invoice price before recording, so they never appear in the ledger.

Key formulas to remember

Cost of sales: Opening inventory + Purchases + Carriage inwards − Purchase returns − Closing inventory; Use net purchases after returns. Carriage inwards is part of the cost of purchases.
Gross profit: Revenue (net of sales returns) − Cost of sales; Carriage outwards is not deducted here.
Expense for the period (accrual): Cash paid − Opening accrual + Closing accrual; Also use: cash paid + closing accrual − opening accrual.
Expense for the period (prepayment): Cash paid + Opening prepayment − Closing prepayment; A closing prepayment reduces the expense.
Carriage treatment: Carriage inwards → cost of sales; Carriage outwards → distribution costs; Check the direction of the goods.
Discounts: Discounts allowed → expense; Discounts received → income; Trade discounts are deducted from the invoice price and are not recorded separately.

How to solve Cost of Sales, Inventory Adjustments and Other Expenses questions

Work from the trial balance or the given figures in a fixed order. Do the adjustments first, then build the statement.

1Read the adjustments and note which items are in the trial balance and which are new.
2Calculate net revenue by deducting sales returns. Calculate net purchases by deducting purchase returns.
3Add carriage inwards to purchases. Keep carriage outwards for expenses.
4Build cost of sales: opening inventory + net purchases + carriage inwards − closing inventory.
5Calculate gross profit as net revenue less cost of sales.
6For each expense, adjust for accruals and prepayments to get the charge for the year.
7Treat discounts received as income and discounts allowed as an expense. Deduct expenses from gross profit plus other income to reach profit.
8Check the double entry: accruals are liabilities, prepayments are assets, and closing inventory is a current asset.

Quickest way: Cost of sales in four lines

When to use it: Use this for objective test questions that ask for cost of sales or gross profit with limited time.

Write: opening inventory + purchases.
Add carriage inwards and subtract purchase returns.
Subtract closing inventory to get cost of sales.
For expenses, use a mini T-account: cash paid, plus closing accrual or minus closing prepayment, to find the charge.
Ignore carriage outwards, discounts allowed and trade discounts when the question asks only for cost of sales.

Common mistakes in Cost of Sales, Inventory Adjustments and Other Expenses

Including carriage outwards in cost of sales.
Both carriage items sound like part of buying and selling goods.
Fix: Ask which way the goods move. Inwards (from suppliers) goes in cost of sales. Outwards (to customers) is a distribution expense.
Subtracting opening inventory and adding closing inventory.
Students memorise the formula without understanding it.
Fix: Opening inventory was available to sell, so add it. Closing inventory is unsold, so deduct it.
Adding a prepayment to the expense.
Confusion between the expense and the amount paid.
Fix: A prepayment is paid for a future period. Deduct it from the cash paid to get the charge.
Forgetting to deduct purchase returns, or deducting sales returns from purchases.
Returns look similar in a trial balance.
Fix: Sales returns reduce revenue. Purchase returns reduce purchases.
Treating trade discounts as discounts allowed.
Both use the word discount.
Fix: A trade discount is taken off the invoice price and never recorded. Only settlement discounts are recorded as allowed or received.
Ignoring the opening accrual or prepayment when finding the charge.
Students adjust only for the closing balance.
Fix: Reverse the opening balance too. Use the formula or a T-account.

Worked examples

Example 1

A business has: opening inventory $12,000; purchases $85,000; purchase returns $3,000; carriage inwards $2,000; carriage outwards $1,500; closing inventory $15,000; revenue $140,000. Calculate cost of sales and gross profit.

Show the solution

Net purchases = 85,000 − 3,000 = $82,000.
Add carriage inwards: 82,000 + 2,000 = $84,000.
Add opening inventory: 12,000 + 84,000 = $96,000.
Deduct closing inventory: 96,000 − 15,000 = $81,000 cost of sales.
Gross profit = 140,000 − 81,000 = $59,000.
Carriage outwards of $1,500 is a distribution expense and is not used here.

Answer: Cost of sales is $81,000 and gross profit is $59,000.

Example 2

Rent paid in the year was $18,000. At the start of the year, rent prepaid was $3,000. At the end of the year, rent accrued was $2,000 and electricity paid was $6,400 with an opening accrual of $500 and a closing accrual of $900. Calculate the rent expense and the electricity expense.

Show the solution

Rent: the opening prepayment of $3,000 relates to last year's payment but is used this year, so it adds to the charge.
Closing rent accrued of $2,000 is also used but unpaid, so it adds too.
Rent expense = 18,000 + 3,000 + 2,000 = $23,000.
Electricity expense = cash paid − opening accrual + closing accrual.
Electricity expense = 6,400 − 500 + 900 = $6,800.

Answer: Rent expense is $23,000 and electricity expense is $6,800.

Exam tips

In objective tests, read whether the question asks for cost of sales, gross profit or profit. Wrong-answer options often use the figure for another stage.
Check every carriage item for direction. Examiners often include both inwards and outwards.
For multiple response questions, select only the stated number and check each statement for the accrual versus prepayment direction.
For number entry, show the working on your scratch paper and enter the figure without symbols unless told otherwise.
In Section B, set out cost of sales as a clear list so you earn method marks even if a figure is wrong.

Practice questions from Statement of profit or loss and other comprehensive income

Cost of Sales, Inventory Adjustments and Other Expenses: frequently asked questions

How do I calculate cost of sales in ACCA FA?

Add opening inventory and net purchases, include carriage inwards, then deduct closing inventory. Net purchases means purchases less returns outwards. The result is the cost of the goods sold in the period.

Is carriage inwards or outwards part of cost of sales?

Carriage inwards is part of cost of sales because it is a cost of bringing goods to their present location. Carriage outwards is a distribution cost, shown with expenses.

How do accruals and prepayments affect the statement of profit or loss?

They adjust the expense so it matches the period used. Add accruals and deduct prepayments from cash paid. Accruals appear as current liabilities and prepayments as current assets.

Where do discounts go in the statement of profit or loss?

Discounts allowed to customers are shown as an expense. Discounts received from suppliers are shown as income. Trade discounts are not recorded at all because they reduce the invoice price.