Understanding Inventory and Cost of Goods Sold (COGS) for Amazon Sellers

Accounting for inventory and cost of goods sold (COGS) for Amazon sellers is not straightforward. But getting it right is so important to having accurate profit margins that help you make better business decisions as an ecommerce business.
In this video, we take you through the rookie mistake we often see Amazon sellers make when accounting for inventory and COGS. Then we show you how to get it right.
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⬇️ MORE STUFF YOU SHOULD CHECK OUT ⬇️
** INVENTORY & COGS PLAYLIST: **
• Inventory & COGS
** BLOG: Accounting for Amazon Sellers **
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** BLOG: Cost of Goods Sold - A key Number for Ecommerce Businesses **
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** DOWNLOAD: Five Signs of Bookkeeping Trouble with an Ecommerce Business **
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** BLOG: Why the A2X Accounting app can be an Amazon Seller’s Best Friend **
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** VIDEO: Create a Product Cost (COGS) Formula | A Step-by-Step Guide **
• Create a Product Cost ...
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• Understanding Inventor...
#amazonaccounting #inventoryandcogs #ledgergurus

[@LedgerGurus]

For help with your Amazon accounting, contact us here: ledgergurus.com/ecommerce-accountant/ecommerce-accounting-contact/

[@sctrojanballer123]

Where would I find the video you mentioned at 15:10 about pulling amazon inventory report? I could locate it in your channel! Thanks.

[@LedgerGurus]

@@sctrojanballer123 So, occasionally our content creator mentions videos that are in the works, but not published yet. I suspect this is one of those. It's on our list to get done soon. Subscribe to our channel so you can be notified when it's published.

[@kennethw1308]

I don’t usually leave comments but this video addresses EXACTLY what I’ve been trying to understand. Thank you! Thank you!

[@DebHeadworth]

You're a great teacher! (clear, concise, interesting & precise) Thank you!!!

[@LedgerGurus]

You're very welcome!

[@ratfink1234567]

This video is fantastic. Thanks for creating these!

[@mooncross0]

A good video that explains a rather complex process in very simple terms. We are able to apply this simple methodology to our narrow range of FBA products that are similar in cost and character. Thanks for posting this as it confirms we are on the right track with our methods.

[@LedgerGurus]

Excellent!

[@aryanasmith4426]

I like your video presentation. It is informative too, at the same time. Thanks a lot for your guidance!

[@LedgerGurus]

Glad it was helpful!

[@JohnFider]

Very helpful!

[@user-mp7me7yy8e]

Hi, I just found your videos and they are so helpful. Thank you! Question, please. So, I understand the need for a journal entry on a monthly basis for cost of goods sold and I understand how to do that (again, thanks!). Then, how do I explain the line item for the cost of goods sold when it hits my quickbooks account. For example, let's say I successful journal entry my COGS each month for $1,500. How do I explain the $4,500 transaction when it hits my checking account and needs and explanation?

[@LedgerGurus]

The money that's hitting your bank account likely needs to be coded to inventory. The purchase of inventory is the cash part of the transaction. When you move the expense from inventory to COGS, that's not usually a transaction that's hitting your bank account.

[@marketchartpattern]

Hi, thanks this video is very helpful. Could yo upease post the link to the video you mentioned which goes into the Amazon reports to be pulled. Also do you have a video which shows you are maintaining/Booking the COGS in QBO please? How you are setting up the accounts to the BI + P - EI = COGS ? Thanks

[@inventorysoftware]

2 thumbs up 👍🏼👍🏼

[@HaccyTran]

You had mentioned having a video specifically for calculating COGS for Manufacturers. I can't seem to find it, can you link please?

[@LedgerGurus]

This one's not exactly for manufacturers, but it covers how to calculate COGS - kzbin.info/www/bejne/e4vcfJKFaayCnpo

[@wattsobx]

Does the shipping from your supplier to you for the bikes in your example factor in to COGS? What if instead of a bike it’s another product and I receive it and product package it does the packaging count as cogs? (Not shopping packaging but retail)

[@medikiaei4265]

I have a question here: if I add the inventory as a credit, at the end of the year I have to pay tax for that. The Cost of Goods is clear and can be in the report to take the Taxes back but I can not understand how to manage it in Credits and what happens at the end of the year that we send the reports to the Tax Advisor. Can that have any negative impact? especially when the company is based in Germany with so many strange Tax rules!

[@LedgerGurus]

Watch this video. It explains how it should all be set up to do it correctly. kzbin.info/www/bejne/kH3WeoKiopxoiKM

[@kyleg6790]

What happens if you previously bought a few bikes at $1000, they are still in your inventory, but you purchase more of the same bikes at a lower or higher cost? How does that effect the value when recording COGS? Thanks!

[@LedgerGurus]

There are several costing methods used when pricing moves. The most popular ones are FIFO (first in and first out) where you take the costs of the first items bought first and then the latter ones, and then average cost, when you update your average costs each time you purchase product at a different price.

[@wattsobx]

@@LedgerGurus where is that done in something like qb or in a spreadsheet?

[@AF-rm8eg]

Hello, How do I sync or input COGS as a dropshipper using venders like samclubs costco etc into A2X/Quickbooks Online?

[@deaneprox]

Damn it, I've been using the 'frolicking through the hills method'! You mentioned you have a video where you show the same, but for those that manufacture the goods. Could you provide link please? I'd love to have great insight and do this like a boss, but can see it getting complicated as I manufacture.

[@LedgerGurus]

We're still working on this one. Make sure you subscribe to our channel so you're notified when it's ready.

[@deaneprox]

@@LedgerGurus Coolies! Subscribed and will keep my eager beaver eye open for upcoming video, many thanks.

[@halalaffirmations]

Where do I see the ending inventory on amazon?

[@LedgerGurus]

There is an inventory detail report.

[@dimitarpavlov3955]

Here is a tough one (at least to me). Buying parts from overseas (in containers) to manufacture products. Parts in the container have shared use for multiple skus. Freight cost (ocean, land, domestic, customs) varies by far. It would be easy if parts in each container are always the same and they are all completely used out for exactly same products (skus) but that is not the case. One we are talking about hardware in hundreds of thousands, which is measured by weight. Yes, each hardware has its own unique sku but we are talking about hundreds if not thousand of different skus. Some of these parts sell at short period of time while others sit in warehouse for long periods of time. Freight cost changes over time. Some parts were used to make a product while freight cost per container was $1500, others were used from shipment with container cost at $17,000. How do you come up with consistent and true numbers when cost of each sku changes marginally and cant be determined exactly? Domestic shipping: all skus are sold with free shipping whete cost of shipping is factored in the cost of product. Shipping cost for each and every sku varies depending on where product is being ahipped. Orders of multiple skus are combined into one package, therefore reducing overall cost per sku. So domestic shipping varies by far and also cannot be determined as constant value per sku. Personal expenses, we all make some misc purchases through business credit card that turn into personal expense, how do we indicate such expense in your book keeping and also tax returns?

[@dimitarpavlov3955]

By the way very informative. I will be reaching out to you guys. You deserve business as you put the effort and work to put up these informative videos! Thank you for that!

[@LedgerGurus]

I would not try to keep COGS this complex out of a spreadsheet. Many inventory tools like Dear and Finale allow for automatic allocation of landed costs across the SKU's affected and some tools can allocate landed costs across multiple shipments. We would be happy to have a more in depth discussion around some tool options and their capability. Feel free to reach out to us through our website.

[@christinacallaway5319]

Thank you for the helpful info! Also, I really like the template that you used for this presentation. Do you mind sharing where you got it? Is it one you created yourself or is it available somewhere online? Thanks again!

[@LedgerGurus]

Thank you! Here’s where you can access all of our templates and downloads: ledgergurus.com/resources/downloads/

[@rf6208]

So my inventory which i am purchasing from stores to sell on Amazon, which category in accounting is it? cost of goods sold ? Thank you..

[@LedgerGurus]

When purchased, you debit inventory (asset) and credit either cash (asset) or accounts payable (liability), depending on how you purchase the inventory. All these categories are on the balance sheet. COGS doesn't hit the Income Statement until the point of sale. At which point you debit COGS (expense) and credit inventory (asset). As well as debit cash (asset) and credit sales revenue (income). For more details you can view this blog: ledgergurus.com/accounting-for-inventory-purchases-ecommerce-accounting/

[@mihu6615]

Hi, thanks for your videos very helpful. I have both Amazon FBA and FBM sales, should I set up two separate accounts for them or one account for combined sales in my Quick Books? And should I reduce my inventory when I send goods to FBA or when I record the sales? Hope have your help. Thank you very much!

[@LedgerGurus]

Hi Mi, because Amazon FMB and FBA have different fees and fulfillment costs associated with them, separating the sales, COGS, and Gross Profit Margins out for FMB and FBA would be important financial information to see. We often recommend our clients use class tracking in QuickBooks Online to segment the different channels of their business to see where they are making the most money or where the margins are the best. This would also be applicable to FMB and FBA as well. Here is another video we have on recording Amazon sales that may also be helpful: kzbin.info/www/bejne/jJuzdWxrZtmMqsk&lc=UgyKNodxr6H9g4VNKUh4AaABAg As to your inventory question, you still own the inventory when it goes to the FBA warehouse so it would not be expensed through COGS at this point. Inventory should be reduced and expensed as COGS when you record sales for any inventory purchased.

[@mihu6615]

LedgerGurus Thank you 🙏 for the easy understood and very helpful answer!

[@deaneprox]

You mentioned you have another video that explains in more detail on setting up a 'product cost catalog' but I cannot find that video. Do you have a link please?

[@LedgerGurus]

To be honest, we kinda jumped the gun. That video is still in our queue to be recorded and published.

[@Meisam.Safari]

@@LedgerGurus Hi there, thanks for your valuable videos. May I know when you will be uploading a video about 'product cost catalog'? Thanks!

[@LedgerGurus]

@@Meisam.Safari Hi! Have you seen our most recent video on COGS and journal entry in QBO? In that one we walk through product catalog.

[@ianwatts6246]

so I sell books that I buy from charity shops you call them thrift stores in the US. So I do not get a break down on the cost of the books and how many purchased just a credit card receipt. sp i just wondered how I would calculate my GOCs. Plus I do get them given to me free as well so again how would I calculate them

[@LedgerGurus]

Those that are free have no COGS really and those that you buy in bulk just need to have the costs allocated across the books. You can allocate in any way you want but the simplest would be to just divide the total by the number of books.

[@nkemanizor5388]

Greetings! I only sell one product online not on Amazon. QB pulls all my revenues from my website and my bookkeeper logs the merchant processing fees as part of my COGS. I make large inventory purchase every 3 months or so that have been expensed at the time of payment as you mentioned. Can I switch to the proper way of tracking COGS as sales come in without upgrading to the QB version that includes inventory tracking? I've been using a spreadsheet to "see" my profitability, but I'd like to be able to look at my monthly P/L and see my actual gross margin. Thanks!

[@LedgerGurus]

Yes you can without switching, just use journal entry to make adjustment.

[@florencemarcelin7068]

Do I need to put the COGS in the chart of account ,or Do I need to use spread sheet to calculate it?

[@LedgerGurus]

COGS should be included in your chart of account as a special expense type. It is actually listed as a specific account type option inside QuickBooks. Most of our clients also use spreadsheets to track COGS if they aren't using an inventory tool.

[@m.gutierr7520]

hi! so if i'm dropshipping and i don't really hold any physical inventory, I only purchased as i sell, how can I record this? DO YOU HAVE A VIDEO ABOUT THIS?

[@LedgerGurus]

Dropshipping is expensed as COGS at the time the expense is incurred. We don't have a video specifically about dropshipping, but here is our inventory playlist - kzbin.info/www/bejne/mae2ZpmGfbqJgMk

[@inventorysoftware]

What should I tell my clients that have been doing it wrong? I.e. costing everything and inventorying nothing. When I walk onto the project I find they have 1/4-1/2M in Inventory but nothing on the balance sheet. Come to find out, they’ve been costing everything out all along. 😱

[@LedgerGurus]

As you have stated Lance, this happens because they have been prematurely expensing inventory. Getting that inventory back on the balance sheet has to come from somewhere and the most correct way to do it is to reclaim it from prior periods by going through prior periods and correcting the movement of inventory through the books. That said, this approach can be time consuming and expensive. It will also have huge tax implications that will always result in higher taxable income for prior periods because cost of goods sold will always be reduced for prior periods and taxable net income will always be higher. We aren’t tax accountants so we aren’t giving guidance here on how to handle this for tax purposes but we have often see companies draw a line in the sand for operational purposes and have a set of books before they made the change and then a cross over where they put inventory back on the books against prior retained earnings as the journal entry and then handle the inventory correctly going forward. The journal entry to put it back would be a debit to inventory to put it back on the balance sheet with the credit to retained earnings if this is happening at a period cross over where all expenses have already been closed to retained earnings. If it’s being done period by period it would be a debit to inventory and a credit to cost of good sold for each period where cost of goods sold was overstated.

[@jeffcarpenter4086]

Nah you can expense inventory right away if it costs less than $2500. This is accrual accounting and completely useless. Use cash accounting for your Amazon business.

[@PoaPoa1]

Should we use cash basis or accrual accounting method?

[@LedgerGurus]

This is all accrual accounting.

[@adamsaldana5462]

I am a bookkeeper. I am setting up the books for my friend's amazon account. He did not track his inventory at all, how should I approach finding a solution to get an accurate inventory amount?

[@LedgerGurus]

Here's a link to our Inventory playlist. Look especially at the one talking about creating a product cost catalog - kzbin.info/aero/PL8z_d3aPaZE-n25ANPG09V08UwrpiDB8E

[@ashokkelkar846]

what about goods in transit effect of Inventory?? please have report on Goods in Transit

[@LedgerGurus]

Goods in transit will be included in your inventory if they are FOB Shipping. FOB shipping means that they are owned by the party purchasing them at the time they leave the warehouse of the vendor. The opposite of FOB shipping is FOB destination, and if those are the terms, then you don't own the inventor until it arrives at your warehouse. Lot's of people tracking inventory in transit will treat transit like a separate location if they are using an inventory software and then receive it into their warehouse when it arrives.

[@ashokkelkar846]

@@LedgerGurus Please create video for goods in transit Inventory for Customer return & refund in case of Amazon Business

[@lillianimports14]

Hi, if my cost to manufacture a product unit is say $10 and the cost to bring each unit over from my supplier in China is say $2, and I sell that unit, is my COGS considered $10 or $12?

[@LedgerGurus]

Your buy cost is $10 and your landing cost is $2. Both are considered legitimate ways to calculate COGS, though landing cost is more accurate, though harder to track.

[@wattsobx]

@@LedgerGurus higher the cogs lower the tax burden right?

[@jellycrackersmerch8221]

are you available to answer a question.

[@LedgerGurus]

What is your question?

[@jellycrackersmerch8221]

I never entered inventory. Just cogs. If I want to remove obsolete products, how do I do this from cogs. Or how do I do this at all.

[@LedgerGurus]

@@jellycrackersmerch8221 It sounds like you're missing some important parts of this process and expensing inventory purchases right to COGS when they're made. By the way, this is a common mistake. Inventory purchases should be coded initially to the balance sheet. Then AS IT IS SOLD, it is removed from the inventory balance THROUGH COGS. Here is a blog explaining the process the way it needs to be done - ledgergurus.com/accounting-for-inventory-purchases-ecommerce-accounting/. We also have multiple videos on this process in our Inventory and COGS playlist - kzbin.info/aero/PL8z_d3aPaZE-n25ANPG09V08UwrpiDB8E

[@jellycrackersmerch8221]

@@LedgerGurus so at this point, I cannot remove obsolete items from cogs?

[@LedgerGurus]

@@jellycrackersmerch8221You would remove from inventory on the balance sheet, not cogs

[@jeffcarpenter4086]

If you have an Amazon business and your products cost less than $2500 each. Don’t use this method of accounting You can use cash accounting and expense inventory right away. This person should not be qualified to give you advice on this subject. If your putting inventory on the balance sheet you are screwing yourself over

[@debSilbert]

Explain

[@LedgerGurus]

We would like to learn more about your opinion as well.

[@elelegidoriginal]

You talk too quickly and, even as a native English speaker, it's difficult to understand what you are saying. Try slowing down a little; there are no prizes for finishing your presentation a couple of minutes early.

[@LedgerGurus]

KZbin lets you slow down the speed if you would like :)