Best Practices for Handling Buy Costs / COGS for Sellers
Managing buy costs and calculating cost of goods sold (COGS) are crucial for eCommerce sellers, particularly when ensuring accurate bookkeeping and maintaining compliance with tax regulations. In this blog post, we'll break down the key considerations and best practices for tracking buy costs, handling inventory, and accurately reporting COGS, based on insights from experienced bookkeeping professionals.
Tracking Your Buy Costs
There are various ways to track buy costs, including tools like Inventory Lab, Sellerboard, and Sellerise, as well as manual methods like spreadsheets. Each seller may track buy costs differently, including only the landed cost (the item price and inbound shipping) or other components like prep center fees.
However, the ideal bookkeeping method for tracking buy costs focuses on just the cost of the goods sold, which includes:
The price paid for the item.
Inbound shipping to your warehouse or fulfillment center.
Sales tax (if applicable).
This basic approach ensures that your inventory values are accurately represented on your balance sheet, reflecting the actual costs of the items in stock. When these items sell, the buy costs are moved from inventory assets to COGS, ensuring an accurate reflection of profitability.
Why You Shouldn't Include Prep Fees in Buy Costs
Some sellers bundle operational costs—like prep center fees or sourcing costs—into their buy costs for convenience. While this might seem logical when analyzing profitability on a per-item basis, it's not ideal for bookkeeping purposes. Including these costs complicates financial reporting in several ways:
Loss of Visibility on Profit and Loss (P&L) Statements: Prep center fees and other expenses should appear as separate line items on your P&L. If bundled into buy costs, it becomes harder to track overspending or discrepancies.
Inaccurate Inventory Reconciliation: Lumping extra fees into buy costs makes it difficult to reconcile your inventory, leading to potential errors and the inability to verify inventory accuracy against statements.
Tax Complications: When prep fees are bundled into inventory, they are not immediately deductible as an expense under cash accounting. This means you could miss out on tax benefits, especially if you want to deduct large expenses at the end of the year.
For best practices, sellers should separate these costs and maintain two sets of records: one for buy costs and another for operational fees if needed for management purposes.
Accrual vs. Cash Accounting Methods
Many eCommerce businesses use cash basis accounting for taxes, meaning expenses are deducted when paid, while revenue is recognized when received. However, inventory is typically handled on an accrual basis, where COGS is recognized only when items are sold.
Including fees like prep center costs in buy costs causes problems in cash accounting. Since these expenses won't appear on your P&L, it makes tax time more complicated, and you may miss out on opportunities to reduce taxable income by deducting expenses when they're incurred.
For example, if you pay $10,000 in prep fees in December, those costs should be deducted in that month. If included in inventory, however, they won't be expensed until the items sell, potentially missing a key tax-saving opportunity.
Handling Returns and Reimbursements
Returns are common in e-commerce, and handling them correctly is important for accurate COGS calculations. When Amazon marks a return as "sellable," it gets added back to your inventory, and your bookkeeping team needs to make manual adjustments to reflect this.
For unsellable items, the cost is already written off in COGS. If you sell unsellable items on another platform, such as eBay or Facebook Marketplace, you should assign a minimal buy cost (e.g., $0.01) to these items to ensure your financial records stay clean.
Additionally, reimbursements for lost or damaged inventory should also be manually adjusted in your books to maintain accurate COGS reporting.
Reconciling Inventory for Accuracy
Achieving 100% accuracy in COGS and inventory reporting is challenging, and the only way to fully reconcile these numbers is through regular physical inventory evaluations. This process involves counting all your stock, including:
Inventory at Amazon fulfillment centers.
Stock at prep centers or warehouses.
Items in transit to you.
Many sellers opt to do this only once a year during tax season, but quarterly or even monthly inventory evaluations can significantly improve the accuracy of your financial statements. Regular updates to buy costs in your inventory management system are also essential for preventing discrepancies.
Key Takeaways
Keep buy costs simple: Include only the price of the item, inbound shipping, and sales tax. Avoid adding operational costs like prep center fees.
Separate operational fees: Track prep center and other fees separately for better visibility on your P&L and easier tax reporting.
Reconcile inventory regularly: Conduct physical inventory evaluations to ensure your COGS and inventory numbers are accurate.
Stay on top of buy cost updates: Ensure that buy costs are updated promptly in your inventory management system to avoid inaccuracies in financial reporting.
Understand your accounting method: Be aware of how your accounting method (cash or accrual) affects your COGS and expenses for tax purposes.
By following these best practices, eCommerce sellers can maintain accurate financial records, make better decisions based on reliable data, and avoid potential tax complications down the road.
Why Are My Inventory Lab and Sellerboard Numbers Different Than the Bookkeeping Numbers?
A common question that clients often ask when receiving their first set of books is why the numbers from platforms like Inventory Lab and Sellerboard differ from the numbers presented in their official bookkeeping.
First and foremost, it's important to note that the numbers from your bookkeeping will rarely align perfectly with what you see in Inventory Lab or Sellerboard. This is a common experience for many Amazon sellers working with bookkeeping companies, and it stems from differences in how data is collected and reported.
Our bookkeeping is based on Amazon's settlement reports, which are also used to generate your 1099 forms—the reports the IRS relies on for tax purposes. Because these settlement reports directly reflect your payouts, we use them as the foundation for generating your revenue, COGS, and other key figures.
Our Methodology: Settlement Reports and Link My Books
We use a software tool called Link My Books, which pulls settlement data directly from Amazon. This tool provides an accurate breakdown of your revenue, fees, discounts, and more, reconciling these numbers with your cash deposits.
However, one major source of discrepancies lies in how sales data is attributed to different months. For example, if your settlement report spans two months, such as when you're paid on the 7th of the month, the data will be split between the previous and current months. This minor date shift can cause differences in how Inventory Lab and Sellerboard display their reports versus our bookkeeping.
Cost of Goods Sold (COGS): A Deeper Dive
COGS is one of the most challenging areas to align across different platforms. Here's how we handle it:
Average Costs: We input average costs into Link My Books, which then calculates COGS based on the order numbers from Amazon's reports. However, fluctuations in inventory prices can create confusion. For example, if you purchased 300 units at $5 and then another 200 at $7, we must average out these costs over a period to reflect COGS correctly.
Returns and Adjustments: How returns are handled is another area that causes differences. Some platforms, like Inventory Lab or Sellerboard, retroactively adjust COGS based on the original purchase date, whereas accounting standards require adjustments based on the return date. This is a key reason why bookkeeping numbers may differ from what you see on Sellerboard or Inventory Lab.
Why Inventory Lab and Sellerboard Are Not Accounting Tools
Both Inventory Lab and Sellerboard are fantastic tools for understanding the profitability of your business. However, these tools are not built for accounting purposes. Unlike our system, which adheres to IRS standards, these platforms often adjust their numbers in ways that may not align with accounting principles. For example, Inventory Lab might change COGS after the fact based on updated data, but accounting standards require that once a month is closed, the data shouldn't be altered.
Date Shifting and Unreconciled Data
Another common reason for discrepancies is that Inventory Lab and Sellerboard often shift dates or present unreconciled data. For instance, returns might be attributed to different months, or estimated numbers may be used until final reconciliations from Amazon arrive. These differences can make it difficult to directly compare reports between these tools and your official books.
What Should You Rely On?
If you're ever in doubt about which set of numbers to trust, we highly recommend relying on the numbers from your official books. These figures have been reconciled against Amazon's data and verified for accuracy. While Inventory Lab or Sellerboard may give you an estimate of your profitability, our bookkeeping numbers are aligned with IRS requirements, making them far more reliable, especially in the event of an audit.
Keeping Your Inventory Accurate
Finally, one of the most important steps you can take to ensure your numbers are accurate is to conduct regular physical inventory checks. While many clients prefer to do this once a year, we recommend performing these checks more frequently, such as quarterly or even monthly. This helps ensure that your COGS and inventory numbers are as accurate as possible, especially when accounting for returns, losses, or inventory shifts.
