Inventory Accounting for E-commerce: How to Calculate True COGS with Landed Costs

Most e-commerce businesses calculate their gross margin wrong. Not because they can't do maths, but because they don't know what their inventory actually costs. The difference between the supplier invoice price and the true landed cost is often 20-40% of the invoice value — and if you're not including it in your COGS, your margins look better than they really are.

What Is Landed Cost?

Landed cost is the total cost of a product by the time it arrives at its destination — your warehouse, Amazon FBA inbound, or 3PL. It includes every cost incurred to get the product from factory gate to stock location.

A product with a £10.00 supplier invoice price might have a true landed cost of £14.50-£16.00. Using £10 as your COGS overstates your gross margin by 30-40% on that product.

The Cash Accounting Problem

Cash accounting records income when received and expenses when paid. For inventory-holding e-commerce businesses, this creates meaningless accounts. You pay for stock in September. Goods arrive in October. You sell them in November. Under cash accounting: September shows a large cash outflow with no revenue; November shows strong revenue with no cost. Neither shows your actual margin.

Accrual accounting matches cost to revenue — COGS for stock sold in November is recognised in November, regardless of when you paid. For any e-commerce business holding more than one month's stock, accrual accounting is not optional if you want reliable management information.

How to Calculate Landed Cost Per Unit

Selling these units at £25 each: gross margin using supplier invoice cost is 60%. Using true landed cost, it's 48%. This 12-percentage-point difference is the margin that disappears without proper COGS accounting.

Freight Cost Allocation

Freight is rarely paid per SKU — most businesses ship mixed containers. Three allocation methods:

• By unit count: freight divided equally across all units. Simple but ignores product size/weight differences.
• By weight or volume: allocate in proportion to each product's weight or cubic volume. Most accurate for mixed shipments. Requires weight/dimension data per SKU.
• By value: allocate in proportion to each product's invoice value as share of total. Simple if weight data unavailable.

Most specialist accountants recommend weight-based allocation. Inventory management systems like Linnworks or InventoryLab support weight-based freight allocation natively.

Import Duty and VAT: Two Very Different Costs

Import duty is a genuine cost — not reclaimable. It increases your landed cost and should be included in COGS.

Import VAT, for a VAT-registered business, is reclaimable on your VAT return. It flows through accounts as a receivable from HMRC rather than a permanent cost. Do NOT include import VAT in your landed cost calculation — incorrectly doing so overstates your costs and understates your margins.

Inventory Valuation at Year End

Your closing inventory should be valued at landed cost, not supplier invoice price. For a business holding £50,000 of stock at invoice value with 25% additional landed cost, the correct balance sheet value is £62,500. The difference flows directly into your profit figure.

FBA sellers must also account for stock in transit, stock at Amazon warehouses, and stranded or unfulfillable inventory. Each category requires separate treatment and correct valuation at year end.