Smart Bookkeeping for Smart Sellers
Calculate your true cost of goods sold
The value of your inventory at the start of the accounting period
Total inventory purchased plus direct costs (shipping, packaging, etc.)
The value of unsold inventory at the end of the accounting period
Wages paid to workers directly involved in production
Factory rent, utilities, equipment depreciation, etc.
Inbound shipping costs to receive inventory
Cost of Goods Sold (COGS) represents the direct costs of producing or acquiring the goods you've sold during a specific accounting period. For eCommerce sellers, accurately calculating COGS is essential for understanding true profitability and making informed business decisions.
COGS = Beginning Inventory + Purchases - Ending Inventory
For eCommerce businesses, COGS typically includes:
The wholesale or manufacturing cost of items you sell, including raw materials and components.
Freight and shipping costs to get inventory from suppliers to your warehouse or fulfillment center.
Wages for employees directly involved in production, assembly, or preparing products for sale.
Boxes, bubble wrap, branded packaging, and materials needed to ship products to customers.
Warehouse storage costs and fulfillment center fees like Amazon FBA storage charges.
Factory rent, utilities, equipment depreciation if you manufacture your own products.
Different businesses use different inventory valuation methods to calculate COGS:
Assumes the oldest inventory sells first. Best for products with expiration dates or when prices are rising. This method often results in lower COGS and higher profits during inflationary periods.
Assumes the newest inventory sells first. Can reduce taxable income when prices are rising, but less common for eCommerce businesses and not allowed under some accounting standards.
Calculates COGS using the average cost of all inventory. Ideal for businesses selling similar items purchased at different prices. Provides a balanced approach between FIFO and LIFO.
Tracks the actual cost of each individual item sold. Perfect for high-value or unique products like electronics, jewelry, or custom items where each unit can be individually identified.
Understanding your COGS is critical for several business decisions:
COGS directly affects your gross profit margin. Lower COGS means higher profits from each sale.
Knowing your true costs helps set competitive prices while maintaining healthy margins.
COGS is deductible from your revenue, reducing your taxable income and tax liability.
Accurate COGS helps forecast cash flow, plan inventory purchases, and make growth decisions.
Not tracking inventory properly: Many sellers lose money by not maintaining accurate inventory records. Use inventory management software to track beginning and ending inventory values precisely.
Forgetting indirect costs: Don't overlook costs like inbound shipping, customs fees, or packaging materials. These all impact your true COGS and profitability.
Mixing COGS with operating expenses: Items like marketing, advertising, office rent, and shipping to customers are NOT part of COGS—they're operating expenses that come after gross profit calculation.
Inconsistent calculation methods: Choose one inventory valuation method (FIFO, LIFO, or average cost) and stick with it consistently for accurate period-to-period comparisons.