Ecommerce Inventory Accounting: Landed Cost & COGS

Stock purchases, stock on hand and cost of goods sold are different figures. This guide combines inventory valuation and landed-cost calculations so you can explain the margin on products sold and the value of goods still held.

Confirm the accounting basis first

A sole trader using cash basis does not necessarily calculate taxable profit in the same way as a company or a business using traditional accounting. Keep a useful stock record for management decisions, but apply the correct basis to the accounts and tax return. See HMRC’s cash basis guidance.

Build a supported landed cost

For accounts using an inventory valuation, consider the purchase cost and the costs of bringing stock to its present location and condition. Allocate relevant freight, duty and handling on a reasonable basis. Recoverable import VAT is not an inventory cost; recovery eligibility and supporting documents must be checked. Do not automatically capitalise selling costs or abnormal losses. See HMRC’s guidance on inventory cost.

The £250 duty is an assumed amount from a customs entry, not a tariff calculation. This example excludes recoverable VAT and assumes all listed costs qualify. At a selling price of £25 excluding VAT, a £13 unit cost leaves £12 gross profit before selling costs, a 48% gross margin. Fees, advertising and returns will reduce the contribution further.

Allocate freight consistently

For a mixed shipment, choose an allocation method that reflects the cost driver: weight, volume, units or value may be appropriate. Document the method and reconcile the allocated total to the invoice. There is no single best allocation basis for every shipment.

Track raw materials, unfinished work and finished goods

A maker may hold raw materials and work in progress as well as finished items. A reseller may hold units at home, a 3PL and fulfilment centres. Use consistent product identifiers, locations and movement records. Do not count the same unit in both an in-transit report and a warehouse receipt.

Cost of goods sold and valuation methods

A simple reconciliation is opening stock plus relevant purchases and production costs, less closing stock, with supported adjustments. Select a permitted costing method for the applicable accounting framework and inventory type, such as specific identification, FIFO or weighted average where appropriate. Do not import US LIFO assumptions into UK accounts. Apply policies consistently and discuss changes with the accountant.

Year-end cut-off, damage and slow-moving stock

• Reconcile physical counts and fulfilment-centre reports to the stock ledger.
• Review in-transit goods against the contract, shipping evidence and applicable recognition criteria. Incoterms allocate delivery obligations and risk; they do not by themselves settle legal title or every accounting question.
• Identify returns, damaged units and stock that cannot be sold at its recorded value.
• Support write-downs with evidence for the specific lines; avoid an unexplained blanket percentage.

Where the relevant basis requires the lower of cost and net realisable value, compare cost with the expected selling proceeds less the remaining completion and selling costs. Read HMRC’s net realisable value guidance.

Reconcile fulfilment costs as well as stock

Match 3PL storage, pick-and-pack and other charges to the contract and activity records. Distinguish inventory costs from costs of selling and fulfilling orders. Investigate unusual variances rather than relying on a universal percentage threshold.

For import records, see C79 and postponed VAT accounting. For ongoing records, see monthly bookkeeping and pricing.