Inventory accounting is where margin reality and management reporting diverge most often in UK e-commerce. The wholesale cost on the Alibaba invoice is not the cost of goods sold. The COGS line that drives gross margin includes freight, duty, UK import VAT routing, insurance, inbound handling, and inventory shrinkage. Get the landed-cost composition wrong and every product profitability decision downstream is wrong.
This pillar covers the major inventory and supply-chain accounting decisions for UK e-commerce. Each section links to a detailed companion piece.
The cheap invoice is not the cost
A unit invoiced at $4.20 from China lands in a UK 3PL at a true cost of roughly £6.80 to £8.50 once freight, duty, handling, and an apportioned share of inbound shrinkage are added. Brands that price off the invoice cost rather than the landed cost run gross margins 20 to 30 percentage points below what their P&L suggests, and discover the gap when annual stock-take and year-end adjustments bite.
Landed cost components
- Supplier invoice cost (in supplier currency, converted at shipment-date FX).
- International freight (sea or air) apportioned per unit by weight or volume.
- UK import duty (commodity-code-specific, recoverable as cost not VAT).
- Import VAT recovered via PVA or C79, recoverable as input VAT not COGS.
- Inbound 3PL handling (per pallet or per unit).
- Customs brokerage and clearance fees.
- Inbound shrinkage allowance (typically 0.5% to 2% based on supplier history).
FIFO vs AVCO
UK GAAP (FRS 102) allows both First In First Out (FIFO) and Average Cost (AVCO) for inventory. FIFO is the default in most cloud accounting and IMS platforms (Xero, Linnworks, Cin7). AVCO smooths cost spikes from rising supplier or freight costs and is preferred by brands with frequent restocks at varying prices. The choice must be applied consistently; switching mid-year requires disclosure and recalculation.
Year-end goods in transit
Inventory ordered before year-end but in transit at the balance-sheet date may or may not be on the books, depending on Incoterms. FOB (Free On Board) transfers title at the supplier's port: in-transit stock from a FOB shipment is the buyer's asset and must be inventoried. EXW (Ex Works) transfers title at the supplier's warehouse: still the buyer's asset. CIF and DDP shift the risk transfer point but generally do not change the accounting cut-off. Year-end stock-take procedures must include in-transit reconciliation against open purchase orders.
3PL billing rarely matches the model
Third-party logistics providers bill on a per-pick, per-pack, per-storage-cubic-foot, plus surcharges basis. The monthly invoice is often a substantial multi-line bill that needs reconciling against the IMS pick records and the storage allocation model. Discrepancies above 3 to 5% should trigger a 3PL audit; some 3PLs systematically under-bill or over-bill. Building a 3PL cost-per-order model is one of the highest-ROI finance projects for a £2m+ ecom brand.
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