Cost of Goods Sold vs. Operating Expenses: What Every Business Owner Should Know
- K Liu Accounting Services Inc.
- Jul 4
- 2 min read
When it comes to managing your business finances, understanding the difference between Cost of Goods Sold (COGS) and Operating Expenses (OpEx) is essential. Both are crucial components of your income statement, but they represent two distinct types of costs and affect your bottom line in different ways.
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold refers to the direct costs incurred in the production of the goods or services your business sells. These are costs that are directly tied to revenue generation—meaning, without selling your product or service, these costs wouldn’t exist.
Examples of COGS include:
Raw materials or inventory costs
Direct labour (e.g., wages of production staff)
Manufacturing supplies
Packaging and shipping for sold products
Merchant fees directly tied to customer sales
For service-based businesses, COGS may include items like subcontractor fees, or tools and software used exclusively to deliver a billable service.
COGS is subtracted from your revenue to calculate Gross Profit, which is a key metric for evaluating your business’s profitability at its core operations.
What are Operating Expenses?
Operating Expenses (OpEx) are the indirect costs of running your business on a day-to-day basis. These expenses are not directly linked to the production or delivery of your goods or services, but they are necessary for your business to function.
Examples of Operating Expenses include:
Rent or office lease
Utilities and internet
Marketing and advertising
Salaries of admin or sales staff
Insurance
Office supplies
Accounting, legal, or consulting fees
Operating Expenses are listed after Gross Profit on your income statement and help determine your Net Income.
Key Differences Between COGS and OpEx
Feature | Cost of Goods Sold (COGS) | Operating Expenses (OpEx) |
Direct vs Indirect | Direct cost of producing goods/services | Indirect cost of running the business |
Linked to Sales? | Yes – incurred only when sales are made | No – incurred regardless of sales activity |
Affects Gross Profit? | Yes – used to calculate Gross Profit | No – deducted after Gross Profit |
Examples | Inventory, production labour, shipping | Rent, marketing, admin salaries |
Understanding this distinction helps you better analyze your business performance, price your products effectively, and identify areas for cost optimization. It’s also crucial for preparing accurate financial statements and tax filings.
How K Liu Accounting Services Inc. Can Help
At K Liu Accounting Services Inc., we specialize in helping business owners understand and manage their financials with clarity. Whether you’re a product-based company with inventory or a service-based business with subcontractors and tools, we’ll help you accurately categorize COGS and OpEx, ensure your books are compliant, and identify opportunities to maximize profitability and minimize taxes.
Not sure if you’re classifying your business expenses correctly? Let’s talk! Contact us today through the link in our bio to learn more about how we can support your business with reliable bookkeeping, tax planning, and financial guidance.
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