Dave thought everything was going fine.
He ran a commercial property maintenance company. Solid team. Regular clients. Decent revenue.
But one Friday afternoon, reviewing his Profit & Loss report, something didn’t sit right. His gross profit margin seemed off—way off. It said he was making a 48% margin.
Except his bank account said otherwise.
So, he called us.
Turns out, like many service-based business owners, Dave had been categorizing almost everything as a general expense. Subcontractors, supplies, mileage—even labor. It was all lumped into operating expenses. His COGS section? Practically empty.
“I thought COGS was just for products,” he said.
And there it was.
Let’s fix that. Because when your Cost of Goods Sold (COGS) isn’t set up right in QuickBooks Online, your financials lie to you. And they lie loud.
What Is Cost of Goods Sold (COGS)?
On your Profit & Loss report, Cost of Goods Sold (or Cost of Services Sold) appears right below your income section.
This category represents the direct costs it takes to produce a product or perform a service.
Think of it this way:
💡 If you could not deliver your service or product without this expense, it likely belongs in COGS.
It’s that simple.
How to Know What Belongs in COGS
When building your COGS section in QuickBooks Online, ask yourself two key questions:
- Does this expense directly help me perform my service or create the finished product for my customer?
- Is this cost a part of the final thing my customer is paying for?
If you can answer “yes” to either of those, it’s a strong indicator that the expense belongs in Cost of Goods (or Services) Sold.
Let’s walk through some real examples across different industries.
Example 1: Commercial Maintenance Company
Let’s say you run a commercial property maintenance company — you maintain office parks, retail centers, or apartment complexes.
Here’s how your COGS might look:
Included in COGS:
- Equipment rentals (lifts, pressure washers, etc.)
- Subcontractor labor for specialized work
- Supplies like lightbulbs, locks, or salt for icy sidewalks
- Fuel or mileage directly related to service routes
These are all necessary to perform your contracted maintenance work — without them, your team couldn’t complete the job.
Excluded from COGS:
- Office rent
- Dropbox or Google Drive subscriptions
- Accounting software
- Marketing or advertising costs
These help your business run, but they don’t directly help you perform the service. Those go under Operating Expenses instead.
Example 2: Public Relations (PR) Firm
Now imagine you own a PR agency. Most of your expenses — software, internet, client lunches — might seem like they should go into overhead. But there’s one big exception.
Included in COGS:
- Advertising or marketing placements you buy on behalf of your clients
If you’re purchasing ad space or sponsored placements as part of the service you deliver, that cost belongs in COGS.
Excluded from COGS:
- Advertising for your own PR firm
- Subscriptions or office tools
- Admin labor not tied to specific client projects
See the difference? The key is whether the cost benefits your client’s end product, not your own business.
Example 3: Plumbing or Trade Services
For trades like plumbing, HVAC, or electrical, your COGS typically includes more direct costs.
Included in COGS:
- Labor for your field techs
- Parts and materials used for each job
- Vehicle expenses (fuel, maintenance, etc.) used to reach job sites
Because you can’t complete your work without driving to the client or using those parts, those are the costs of performing your service.
Excluded from COGS:
- Office staff wages
- Marketing campaigns
- Rent for your office or warehouse
Example 4: Accounting or Financial Services
Some industries — like accounting, bookkeeping, or financial advising — have very light COGS sections.
Why? Because there’s not much beyond time and expertise required to deliver the service.
Included in COGS:
- Direct labor costs for staff performing client work
- Possibly internet or software directly tied to client service delivery
Excluded from COGS:
- Rent, utilities, admin software, marketing, and all general overhead
For these businesses, your gross profit margin will naturally be higher because your direct costs are minimal.
How to Set Up COGS in QuickBooks Online
Now that you understand what goes in and what doesn’t, let’s walk through how to set up your Cost of Goods Sold in QuickBooks Online.
Step 1: Create a COGS Account
- Go to Settings ⚙️→ Chart of Accounts → New
- Select Account Type: Cost of Goods Sold
- Choose a Detail Type (e.g., Subcontractors, Supplies, Direct Labor, etc.)
- Name it clearly — for example, “COGS – Subcontractors” or “COGS – Materials”
Step 2: Categorize Transactions Correctly
When entering expenses or matching transactions from your bank feed:
- Assign all direct costs to your COGS accounts.
- Assign overhead costs to operating expense categories.
Keeping these consistent ensures your Profit & Loss report stays accurate.
Step 3: Review Monthly
At the end of each month, review your Gross Profit Margin (Income – COGS).
If the numbers fluctuate heavily without reason, something might have been miscategorized.
Common Mistakes to Avoid
Here are the top errors we see when cleaning up client books:
❌ Putting everything in COGS
Just because it’s a business expense doesn’t mean it belongs there.
❌ Forgetting labor costs
If your team or subcontractors directly perform the service, their labor should be included in COGS.
❌ Mixing personal or admin expenses
This muddies your margins and makes your financial data unreliable.
❌ Not updating COGS accounts regularly
Your business evolves — so should your COGS categories. Review quarterly to ensure they still match how you deliver your services.
Why COGS Accuracy Matters
When your Cost of Goods Sold is set up correctly in QuickBooks Online, you gain three big benefits:
- Accurate Profit Margins
- You’ll know exactly how much it costs to serve your clients — and whether your pricing supports your goals.
- Better Decision-Making
- Clean data helps you identify where you’re spending too much or where your services are most profitable.
- Tax Efficiency
- Accurate categorization ensures you claim all the deductions you’re entitled to while staying compliant.
A Simple Analogy: Your Financial Recipe
Think of your business like a recipe.
Your COGS are the ingredients — the flour, eggs, and butter.
Your Operating Expenses are the kitchen utilities — the oven, electricity, and rent.
Both are necessary to run a bakery, but only one goes into the cost of making the cake.
Final Thoughts
Setting up your Cost of Goods Sold properly in QuickBooks Online helps you see your business clearly — not through a fog of mixed-up expenses.
When you know your true costs, you can price smarter, manage better, and grow with confidence.
If you’re not sure whether your COGS is accurate or need help cleaning up your books, we can help you organize your QuickBooks Online file for better clarity and consistency.
📞Ready to get confident in your numbers?
Schedule a discovery call with our team to review your setup and ensure your Profit & Loss report tells the real story of your business.
