COGS and profit in simple terms

COGS and profit in simple terms

What it is

Revenue is the total money you bring in from sales. But profit is not the same as revenue.

Cost of Goods Sold (COGS) is the direct cost of the products you sell. For a pharmacy, it's the wholesale cost of the medicines. For a restaurant, it's the cost of ingredients. For a service business, it might be the cost of materials used in the service.

Profit = Revenue − COGS − Operating Expenses

This simple formula is the heart of business accounting.

Why it matters

• Decision making: You can't just look at revenue to understand your business. If you sell 1,000 AFN worth of goods but they cost you 800 AFN to buy, you only made 200 AFN in gross profit. Once you subtract salaries, rent, and other expenses, your net profit might be very small.
• Pricing: If you don't track COGS, you might not realize you're selling products at a loss.
• Tax: In most countries, you report profit (after COGS and expenses), not revenue. COGS affects how much tax you owe.
• Comparing businesses: Two businesses with the same revenue can have very different profitability depending on their COGS.

How it works in Usystems

When you create an invoice to sell a product:

1. Usystems records the revenue (the selling price).
2. Usystems also automatically calculates the COGS (the cost to you of the product sold) and posts it to your profit & loss statement.
3. The difference is gross profit.

The calculation uses the product's cost (the price you paid for it) and the quantity sold.

Example: Selling medicine at a pharmacy

• You bought: 10 boxes of medicine at 50 AFN per box. Total cost = 500 AFN.
• You sell: 3 boxes to a customer at 100 AFN per box. Revenue = 300 AFN.
• COGS: 3 × 50 AFN = 150 AFN (the cost of what you sold).
• Gross profit: 300 AFN − 150 AFN = 150 AFN.
• Net profit: After subtracting salaries, utilities, rent, etc., your actual profit is lower.

On your profit & loss statement:

Revenue          300 AFN
– COGS          −150 AFN
─────────────────────
Gross Profit     150 AFN

– Operating Expenses (salaries, rent, utilities, etc.)
─────────────────────
Net Profit       (lower number)

Where you see it

• Inventory management: When you record purchases of products, Usystems tracks their cost. When you sell them, COGS is automatically calculated. Open Inventory Open Products
• Profit & Loss (Income Statement) report: Go to Reports and choose the P&L report. It shows Revenue, COGS, Gross Profit, Operating Expenses, and Net Profit. Open Reports
• Invoice detail page: On a sales invoice, you may see a "Cost" or "COGS" section showing the accounting impact.
• Product detail page: Each product has a "Cost" field (the price you paid) and a "Selling Price" (the price you charge). The difference is your per-unit margin. Open Products

Tips

• Keep costs current: If you bought inventory months ago at one price, but prices have changed, update the product cost in Usystems. This keeps COGS accurate.
• COGS only applies to products: Service businesses or professional fees typically don't have COGS (unless you use materials). Those costs are usually "Operating Expenses."
• Margin matters: Gross margin (Gross Profit ÷ Revenue) is a key metric. A 50% margin is healthy; 10% is tight and leaves little room for error.

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