A purchase usually creates an asset first

When an ecommerce business buys goods for resale, the cost generally enters inventory on the balance sheet. The business has exchanged cash or a payable for products it still controls. Profit should not fall merely because a shipment arrived at the warehouse.

The cost becomes an expense through cost of goods sold when the related product is sold, subject to the accounting method and policy used. This matching is why a month with heavy purchasing can have lower cash without having the same reduction in accounting profit. It is also why treating every inventory payment as COGS makes gross margin swing with purchasing schedules instead of customer sales.

The basic rollforward: opening inventory plus purchases and capitalized costs, less COGS and inventory adjustments, equals closing inventory.

Decide what belongs in inventory cost

The invoice price is only one possible component of inventory cost. Freight, duties, brokerage, production costs, and other amounts needed to bring goods to their present location and condition may require consideration. The appropriate treatment depends on the applicable accounting framework and the facts.

Consistency matters. If inbound freight is capitalized in one month and expensed in the next, product margins stop being comparable. Document which costs are included, how shared costs are allocated across SKUs, and when estimated landed costs are replaced with actual amounts.

Costs that deserve a policy

  • supplier price, discounts, credits, and purchase returns;
  • international freight, customs duties, brokerage, and tariffs;
  • packaging or preparation required before the product can be sold;
  • warehouse and fulfillment costs that may instead be period expenses;
  • currency differences between the purchase, payment, and receipt dates.

Use a repeatable costing method

A unit cost must be assigned when products leave inventory. Common approaches include first-in, first-out and weighted average cost. The right method depends on the reporting framework, operations, data quality, and tax requirements. Whichever method is selected should be applied consistently and supported by SKU-level activity.

Marketplace and storefront order data can show units sold, but it does not automatically prove the accounting cost. Bundles, kits, returns, samples, giveaways, replacements, and damaged goods all affect quantity or value differently. Product identifiers also change over time, so merged, renamed, and duplicated SKUs need a controlled mapping.

Negative inventory is an especially useful warning. It can indicate late purchase receipts, duplicate sales, missing transfers, incorrect bundle logic, or a product sold before its opening quantity was loaded. Allowing a system to assign costs while quantities remain unexplained can create precise-looking but unreliable margins.

Reconcile accounting inventory to operations

The general ledger inventory balance should connect to a supporting inventory valuation by SKU or another appropriate level. Quantities should be compared with warehouse, 3PL, and marketplace records. Differences need a documented cause such as timing, shrinkage, damage, in-transit goods, or an integration issue.

Do not expect every system to agree without adjustment. A warehouse may report physical units by location, a storefront may report available units, and accounting may include owned goods in transit. The reconciliation defines these populations and explains the bridge.

Month-end checks

  1. Agree opening inventory to the prior closing balance.
  2. Match purchases to vendor bills, receipts, and goods received.
  3. Compare units sold and returned with channel order data.
  4. Review negative quantities, zero costs, duplicate SKUs, and large adjustments.
  5. Tie the closing valuation to the general ledger and explain differences with warehouse reports.

Read gross margin with the method in mind

Gross margin can change because selling prices, discounts, returns, product mix, supplier costs, freight, duties, or costing assumptions changed. A useful analysis separates those drivers. If COGS is based only on cash paid to suppliers during the month, the analysis instead reflects purchasing timing.

Good inventory accounting does not require the most complex system on day one. It requires a method appropriate to the business, complete source data, a reproducible rollforward, and visible exceptions. Complexity can increase as order volume, channels, warehouses, and product economics justify it.

This article is general information, not accounting, tax, or legal advice for a specific business. Treatment can vary by jurisdiction, accounting method, contract terms, and facts. Consult a qualified professional about your circumstances.