Stock and Cost of Goods Sold: Why Your Online Shop’s Profit Looks Wrong
In March you spent £20,000 on stock and the accounts show a loss. In April you bought nothing and the business looks hugely profitable. Neither month is telling you the truth.
For anyone selling physical products, the cost that matters is not what you bought this month. It is what the goods you actually sold this month cost you. That is cost of goods sold.
Why stock purchases are not a cost straight away
Stock you have not sold is still an asset. It sits in your warehouse, at Amazon, or on a ship, and it will become a cost when it is sold. Treating every purchase as an immediate cost makes profit swing wildly from month to month, and makes it impossible to see whether you are earning a decent margin.
The calculation
For a period:
Opening stock + purchases − closing stock = cost of goods sold
For example, if you started the month with £15,000 of stock, bought £20,000 more, and finished with £24,000 on hand, the goods sold cost £11,000. That is the figure to compare with your sales.
What goes into the cost of stock
The cost of a unit is more than the supplier’s price. It normally includes:
- The purchase price
- Shipping and freight to get the goods to the UK
- Import duty
- Delivery into your warehouse or to Amazon’s fulfilment centres
Import VAT is usually not part of the cost if you are VAT-registered, because it is reclaimed on the VAT return.
Leaving out freight and duty is one of the most common reasons sellers think their margins are better than they are.
Stock held by Amazon is still your stock
Stock in Amazon’s fulfilment centres belongs to you until it is sold. It needs counting in your closing stock, using Amazon’s inventory reports, alongside anything held at home, in a warehouse or with a third-party logistics provider.
Stock that Amazon loses or damages should be written off. The reimbursement Amazon pays should then be set against that loss, rather than posted straight to income. The two belong together: you have lost an asset you had already paid for, and Amazon has compensated you for it, so what matters to your profit is the difference between the two, not the reimbursement on its own.
Treating every reimbursement as extra income overstates your turnover and hides the loss. It also matters whether a reimbursement is for stock or for a fee, because a fee reimbursement reverses a cost you were charged earlier. Our line-by-line guide to the settlement report explains which is which.
Either way, check that you have actually been reimbursed. Many sellers are owed more than they realise.
Valuing what is left
Closing stock is valued at the lower of what it cost and what you can realistically sell it for. Slow-moving, damaged or out-of-season stock may be worth less than you paid. Ignoring this overstates profit, and that can mean paying tax on profit you will never see.
How often to do this
At a minimum, closing stock needs counting and valuing at the year end. For monthly management accounts that are worth reading, it needs doing every month. With good product costs and Amazon’s inventory reports, that does not have to mean a physical count each time.
Profit by product
Once you know the cost of each unit, you can see what each product contributes after Amazon’s fees and its own cost. Our free settlement checker lets you enter unit costs and gives an estimated contribution by product for a settlement. It is a useful first look. It is not your net profit, because it leaves out overheads, unsold stock and VAT, but it quickly shows which products are carrying the business.
A note on the tax rules
Limited companies account for stock using the method above. Sole traders using the cash basis, which is now the default, follow different rules for tax. Even then, you still need the matching approach to understand how the business is really performing.
Next: the other figure that moves your profit is tax — see VAT for UK Amazon and Shopify sellers.
If your stock has never been properly recorded, or your margins do not feel right, book a consultation. Getting stock right is usually the single biggest improvement to an e-commerce seller’s accounts.
