Question

Why do you need to determine the Cost of Goods Sold before you can begin recording the next year’s transactions?

Answer 1

Before recording the next year’s transactions it is necessary to close the previous year’s transactions and books of accounts. For this we need to calculate the total revenues and the total costs of the business for that year. It is necessary to finalize the books of accounts before starting to record the next years transactions. Hence we need to compute the cost of goods sold and calculate the gross and net profit of the business. The net profit retained in the business is carried over to the balance sheet and added to the equity section.