Why is my COGS wrong on my e-commerce profit and loss?
The most common reason COGS is wrong on an e-commerce profit and loss is that inventory isn’t being tracked properly. If you’re recording product purchases as an expense instead of routing them through an inventory asset account, your COGS will match your purchases rather than your actual sales.
COGS should reflect the cost of products you actually sold during the period. The formula is Beginning Inventory plus Purchases minus Ending Inventory equals Cost of Goods Sold. If your accounting software isn’t calculating this correctly, or if you’re skipping the inventory step entirely, the numbers won’t make sense.
Check your ending inventory balance first. If it hasn’t changed in months or doesn’t match what’s actually sitting in your warehouse or FBA, your COGS is being calculated from a wrong number. Physical inventory counts need to happen regularly and get recorded in your books. Without accurate ending inventory, the formula breaks down.
Another common issue is missing landed costs. COGS should include everything you paid to get the product ready to sell. That means inbound shipping, customs duties, tariffs, and sometimes packaging materials. If you’re only counting the unit cost from your supplier, you’re understating what the inventory actually cost you. This makes your gross margin look better than it really is until you wonder where all your cash went.
Platform fees and fulfillment costs often get miscategorized too. Amazon FBA fees, pick and pack charges, and referral fees are operating expenses, not COGS. These are selling costs that happen after the product is ready to sell. When they get lumped into COGS, it inflates that line item and makes your gross margin look worse than it should be while understating your operating expenses.
Returns cause problems if they’re not handled correctly. When a customer returns a product, you need to reverse the revenue and add the inventory back. If you only reverse the revenue, your COGS stays inflated because you counted the cost without counting the return to inventory.
Multi-channel selling adds complexity. If you’re selling on Amazon, Shopify, and maybe a few other platforms, inventory movements need to reconcile across all of them. Selling the same product on multiple channels while only tracking inventory in one place creates gaps where COGS doesn’t match what actually moved.
For e-commerce businesses, getting COGS right matters more than in many other industries because margins are often thin. A 5% error in COGS could swing your reported profit dramatically. You might think you’re making money on a product line when you’re actually losing it.
The fix usually starts with establishing proper inventory tracking in your accounting software. Products get purchased into an inventory asset account. When they sell, the cost moves from inventory to COGS based on your costing method. Your Scottsdale bookkeeping services provider should be reconciling inventory regularly and making sure the flow from purchases to inventory to COGS follows the actual movement of goods.
If your books have been running without proper inventory accounting for a while, you’ll likely need to do some cleanup work to establish accurate balances before the numbers start making sense going forward.
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