Why Are Vendor Payments Going Into a Regular Expense Account?

Question: When I record payments to suppliers, it’s going into a regular expense account called Cost of Goods Sold, but not into my Gross Profit calculation. Why is that?

Answer: Likely, you or someone in your company created an account called “Cost of Goods Sold,” but created it with the account type of “Expense.” This would include vendor (supplier) payments as a regular operating expense, such as telephone and utilities. To have supplier charges included as Cost of Goods Sold, you need to make sure the account type is Cost of Goods Sold. The Cost of Goods Sold account type is a special category of expenses directly related to the generation of income. These Cost of Goods Sold expenses, when set up correctly by account type, will show up as an outflow to be deducted from your sales income to calculate Gross Profit (Total Income less Cost of Goods Sold=Gross Profit).

If your supplier expenses are incorrectly put into general expenses, your Cost of Goods Sold will be understated and your Gross Profit will be overstated.

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