The direct cost of producing what you sold.
Cost of goods sold is the direct cost of producing whatever the business sold in a period: materials, direct labor, freight-in, and — for retailers — the wholesale cost of inventory sold. It's subtracted from revenue first, before operating expenses, to produce gross profit.
The boundary matters: rent, marketing, and admin salaries are operating expenses, not COGS. Keeping the line clean is what makes gross margin meaningful — a number you can compare month to month and against your industry to see whether the product itself is profitable, separate from overhead.
A candlemaker sells $10,000 of candles in March. Wax, wicks, jars, and shipping-in for those candles cost $3,200 — that's COGS, leaving $6,800 gross profit (68% margin). The studio rent belongs below, in operating expenses.
Gross Profit · Profit & Loss Statement (Income Statement) · Fixed Assets — or browse the full plain-English glossary.
Reading a definition is the easy part — the Daily Challenge (ten questions a day, free, no signup) is how terms like this become reflexes. Going for certification? Start with the free ProAdvisor readiness check.